Daily Brief: Where Chinese Inflation Goes, Other Countries Are Bound To Follow

Daily Brief: Where Chinese Inflation Goes, Other Countries Are Bound To Follow

over 2 years ago3 mins

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Data out on Wednesday showed that Chinese producer price rises grew by their fastest since 2018, and the rest of the world might not be far behind.

What does this mean?

China was the first place to bounce back from the coronavirus pandemic, and things are still going strong. So strong, in fact, that demand for some products seems to be outstripping supply. That’s pushing prices up, which might be why the country’s “producer price index” – which tracks the prices of manufacturer-bought goods and services – was up a higher-than-expected 9% in May compared to a year ago.

Commodities are a big reason why: the prices of oil and certain metals have gone through the roof this year, and China’s a major buyer. No wonder, then, that the country’s recently taken steps to bring commodity prices back down…

China PPI

Why should I care?

The bigger picture: Inflation could be China’s next big export.

The risk of high producer prices isn’t just that they feed into Chinese consumer prices: it’s that they’ll push up consumer prices in the US and Europe too, given that China’s one of the world's biggest exporters. That’d push inflation in those regions even higher, at a time investors are already worried it’s too high. More worrying still is that China-linked inflation mightn’t show up in Western data. Governments, after all, don’t pay much attention to prices of West-bought Chinese goods when they calculate inflation, which means economists and central banks might miss its effects even as consumers feel the pinch.

Zooming out: US and China are leaving the others behind.

The World Bank’s expecting the Chinese and US economies to grow 9% and 7% this year compared to last, which would drive global economic growth up by 5.6%. But the world’s developing countries – which are bound to keep struggling with the pandemic – are only likely to grow 2.9%, their second-slowest growth rate in the past 20 years.

World Bank

Keep reading for our next story...

Inditex's Results Were Better Than Expected, Despite The Lockdown Thorn In Its Side

Inditex image

Inditex loves this whole “reintegrating-into-polite-society” look you’ve got going on: the biggest fashion retailer in the world announced stronger-than-expected quarterly results on Wednesday.

What does this mean?

It’s been a weird year, and not a particularly helpful one for gauging growth. That’s why Inditex put its update into context by comparing last quarter’s sales to those in 2019. And it wasn’t exactly a favorable match-up: the Zara owner’s first-quarter sales were down 12% from the same time that year.

Still, it’s not exactly a fair fight: Inditex’s stores were open for 24% less time. So all else equal, you’d probably expect sales to fall by around a quarter. A drop-off of only half that size, then, was seen as a nice surprise, and helped drive a better-than-expected quarterly profit. The trend looks set to continue too: Inditex said that sales are up 5% versus 2019 so far this quarter, even though its stores have been open for 10% less time than normal.

Why should I care?

For markets: The only way is growth.

UBS argued in February that investors would, by the second half of the year, only care about stocks with strong earnings growth, rather than the cheap-looking “value” and economically sensitive “cyclical” stocks that were popular in the first half. But the bank might not have been ambitious enough: Inditex’s high-growth stock is up about 9% in the last three months alone, while a key index of European energy stocks – which ticks both the “value” and “cyclical” boxes – has stayed flat.

Inditex stock
Source: Google Finance

The bigger picture: Keep up with the last fashion.

Sustainability’s been important to European investors for a while now, and it’s forced the fashion industry – the second-most polluting in the world – to do some soul-searching. That’s why second-hand fashion startups have been making a name for themselves. US investors might want to start taking notice of them too: US ecommerce company Etsy just bought UK fashion reseller Depop for $1.6 billion.

Carbon cost of clothing
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