China’s producer price index (PPI) and consumer price index (CPI) inflation diverged in 2015-2016 and again in 2021. Why has this divergence occurred and will high PPI inflation lead to high CPI inflation? To what extent is China’s macroeconomic outlook affected by high PPI inflation and how will PPI and CPI inflation evolve over the next 12 months?

AMRO’s Analytical Note explains that as short-term supply factors gradually fade and government measures to support supply adjustments take greater effect, the gap between PPI and CPI inflation will narrow in 2022.

Moreover, PPI inflation will likely fall only moderately in the first half of 2022, indicating that downstream industries will continue to face high cost pressures and their profit margins will stay squeezed, placing pressure on growth and employment. Consequently, it is important for policymakers to closely monitor the developments of PPI inflation, and, if necessary, take measures to mitigate the cost burden on downstream industries, particularly SMEs.

Author: Zhiwen Jiao