China’s Covid lockdowns, surging oil add to inflation risks

China's factory gate prices rose more than expected in March as oil prices climbed, while disruptions from Covid lockdowns drove up food costs, threatening the inflation outlook in the world's second-largest economy.

The producer price index gained 8.3% from a year earlier, official data showed Monday, down from 8.8% in February and above the median estimate of an 8.1% increase in a Bloomberg survey of economists. Consumer-price growth accelerated to 1.5% after staying unchanged at 0.9% for two months.

The war in Ukraine has pushed up the cost of global commodities including oil, adding to economic pressures as China battles it worst Covid outbreak in two years. Lockdowns to curb the spread of infections across several cities and provinces have disrupted food supplies, driving up prices for consumers during the month. 

"CPI will be affected more than PPI in the near term due to Covid controls such as logistics restrictions, limits on consumer activity and the large-scale tracing protocol, which impacts on truckers," said Nathan Chow, a senior economist at DBS Group Holdings Ltd. He added, though, that both indexes could be impacted if the curbs persist.

China's benchmark CSI 300 Index fell as much as 3% after the inflation data, the biggest drop in almost a month.

Fresh vegetable prices jumped 17.2% on year, compared to a drop of 0.1% in February, data from the National Bureau of Statistics showed. Of the sub-items in the consumer price basket, fuel for transportation rose the fastest at 24.1% on year, according to a breakdown provided by the statistics office.

Manufacturers in pandemic-stricken areas were forced to shutter their doors, or else keep workers on factory floors in so-called closed-loop systems so they could stay operational. Businesses have said they faced difficulties buying raw materials, or faced extended delivery times due to supply chain disruptions. Restrictions also forced consumers to stay in their homes, as many struggled to secure daily necessities or paid high prices for goods.

The year-on-year decline in PPI was mainly due to a high base of comparison from last year, Dong Lijuan, an analyst at the NBS, said in a statement. International commodity prices "continued to soar due to geopolitical and other factors," she said.

China's Covid outbreak and lockdowns could result in further disruption to food supplies, adding to global risks, according to economists at Nomura Holdings Inc.

"Due to lockdowns and transport disruptions in Northeast China, the largest grain production base in China, this year's spring planting of crops may have been delayed and the risk of food shortage may rise in the second half, adding further pressure to the worsening global food shortage caused by the ongoing military conflict in Ukraine," the economists led by Lu Ting wrote in a note. 

Even so, higher inflation is unlikely to prevent the central bank from easing monetary policy to cushion the economy. Unlike major developed economies, China's central bank is in easing mode, having cut interest rates in recent months to boost liquidity and dialled up fiscal spending. 

Authorities in recent weeks have made repeated vows to stabilize the economy as the Covid outbreak worsens, fanning speculation that a policy rate cut or other easing measure could happen soon.  

"The overall consumer price inflation will likely stay low, due to the weak domestic demand as many cities are locked down," said Zhang Zhiwei, chief economist at Pinpoint Asset Management.