China September inflation data due Wednesday; factory-gate prices in focus

At 0130 GMT on Wednesday (9:30 pm Tuesday US Eastern time), China publishes September's consumer and producer price figures. With higher global energy costs still feeding through the economy, the factory-gate gauge is the one most likely to drive market moves.

August is the reference point. Consumer prices rose 0.8% year on year, picking up from 0.5% and matching forecasts, while the 0.4% monthly increase came in above expectations. Producer prices advanced 3.8% y/y against 3.5% previously, with the statistics bureau attributing the gain to rising energy prices.

Three developments are worth tracking.

• The first of these is producer prices. Imported inflation lay behind the August increase: costlier crude oil and non-ferrous metals pushed up domestic petrochemical and smelting prices. Another firm reading would confirm the oil shock is still working through input costs in China.
• The second concerns pass-through to consumers. The headline CPI figure is still a long way from Beijing's informal target of about 3%. Analysts caution that a struggling property sector and subdued spending make it difficult for downstream manufacturers to pass higher costs along, and that once supply-side support fades, factory prices could drift back toward deflation. A widening gap between strong PPI and modest CPI would signal compressed margins rather than inflation generated by demand.
• The third is core CPI, a measure that leaves out food and energy. This is the clearest indicator of whether domestic demand is strengthening or energy is responsible for the trend.

September trade figures are also scheduled. In August, exports climbed 18.6% year on year and imports rose 21.7% in yuan terms, marking the sixth straight month in which import growth exceeded export growth. The surplus, in dollar terms, was roughly $119 billion.

From a market perspective, a strong PPI would reinforce evidence that China, after years of exporting disinflation, is now passing higher goods prices to the rest of the world. A weak CPI would keep attention on sluggish household demand and add weight to arguments for more policy easing.