China’s factory prices jump 5.7%, the fastest in more than four years, but its shoppers are paying almost nothing extra

China’s factories are paying, and charging, more than at any time in more than four years. The producer price index rose 5.7% in the year to October, China’s National Bureau of Statistics said on Monday, beating the 5.3% median forecast and climbing from 5.0% in September, which had itself been the highest in four years.

It was the third month in a row the pace picked up, and the fastest since June 2022. The statistics bureau’s figures pointed to a sharp rise in prices in the mining and raw materials industries.

Consumer prices told a different story. The consumer price index rose 0.7% in the year to October, down from 0.9% in September and below the 0.8% economists expected. Prices were flat from September to October. Core inflation, which leaves out volatile food and energy, slowed to 0.8% from 1%.

Why are factory prices rising so fast?

The rise is concentrated at the start of the supply chain. Mining and raw material prices drove the producer index, and energy has been the common thread through the year, with crude prices held high for much of October by the war involving Iran and the disruption around the Strait of Hormuz.

Dong Lijuan, chief statistician of the bureau’s urban division, said petrol was the largest single contributor to consumer price rises in October, but a sharper-than-expected fall in food prices offset it.

Zhang Zhiwei, president and chief economist of Pinpoint Asset Management, said very strong external demand was behind the producer price rise.

Why are shoppers not paying more?

Because Chinese households are still not spending with confidence. Zhang said domestic demand has been weak because of the property market, the main store of household wealth in China, and said there was “no clear sign of stabilization” there yet. A weak housing market also squeezes the revenue of local governments, which rely on land sales.

That leaves Chinese manufacturers caught in the middle: paying more for coal, oil, metals and chemicals, but unable to pass much of it on to customers at home. Over time, that squeeze shows up in profit margins, or in export prices instead.

How big a turnaround is this?

A large one. For much of 2023 and 2024, China’s factory-gate prices were falling year on year, and the worry in Beijing and abroad was deflation: China exporting cheap goods to the world and dragging prices down with it. A producer index rising at 5.7% is the opposite problem, and it arrives while consumer prices are still barely moving.

What does it mean for Australians?

China is Australia’s largest trading partner and the biggest buyer of its iron ore, so what Chinese industry pays for raw materials feeds directly into Australian export earnings and the federal budget. Higher input prices in China are, on their face, a sign that demand for commodities is holding up.

There is a catch. If Chinese factories cannot pass rising costs on to their own customers, the pressure eventually falls on output and investment, and that is where demand for Australian steelmaking ingredients comes from. China’s own weak consumer numbers are a reminder that the strength is coming from abroad, not from Chinese homes.

For Australian shoppers, the other channel is imports: China supplies a large share of the electronics, clothing and household goods sold here. Rising factory-gate prices in China, if they last, are one of the pressures that can show up on Australian shelves months later.

How did markets react?

Calmly. China’s benchmark CSI 300 index of Shanghai and Shenzhen shares rose 0.56% after the figures were released.