FACTORY gate prices of China rose in annual terms in January for the first time in a year, as months of strong manufacturing growth in the world’s second largest economy pushed raw material costs higher.

The producer price index (PPI) rose 0.3 percent from a year earlier, the National Bureau of Statistics (NBS) said in a statement yesterday, the fastest pace of increase since May 2019 but slightly lagging a 0.4 percent gain tipped by a previous poll of analysts. PPI declined 0.4 percent in December.

Consumer prices, however, unexpectedly slipped into deflation in January, the first time upstream prices have risen faster than downstream costs in more than two years.

China’s return to factory-gate inflation was driven by increases in upstream raw materials, said Betty Wang, an analyst at ANZ.

Rising costs of steel, copper and coal are driving up factory gate prices, with PPI expected to register bigger increases in coming months, according to Bloomberg Economics.

The country’s factories staged a stunning export-driven recovery in 2020 thanks to hot global demand for home electronics and anti-epidemic goods, and as other manufacturing economies struggled with COVID-19 lockdowns.

The economy is expected to grow 8.4 percent this year, following a 2.3 percent rise in 2020 in the wake of the COVID-19 pandemic.

China’s factory activity grew at the slowest pace in five months in January, official data showed last week, reflecting the outbreak’s impact on production and transportation as the country sought to contain COVID-19 ahead of the Lunar New Year holidays.

China reports combined January-February numbers such as trade, industrial output and retail sales in March.

The consumer price index (CPI) fell 0.3 percent in January from a year earlier, the statistics bureau said in a separate statement, compared with no change tipped by the previous poll and a 0.2 percent rise in December.

The slip into deflation was mainly caused by high base effects a year earlier and will likely reverse sharply in February due to Lunar New Year demand, said analysts from Capital Economics in a note. CPI is likely to increase by around 2 percent by the end of the second quarter, they said.

“That shouldn’t alarm the People’s Bank of China (PBOC) but will provide reassurance that they are right to focus on controlling credit risks. As such, we think the PBOC will tighten policy this year,” they said.

Food price pressures are starting to increase again as cold weather combined with travel restrictions impact the transport of meat and vegetables, analysts say.

January CPI data are also impacted by calendar effects, since the Lunar New Year falls in February this year, compared with January in 2020.

(SD-Agencies)