BEIJING (BLOOMBERG) – China’s factory-gate inflation soared last month to the highest level in almost 26 years, fuelled by a nationwide energy crisis and skyrocketing coal prices. Consumer inflation stayed muted.

Producer prices climbed 10.7 per cent from a year earlier, the National Bureau of Statistics said on Thursday (Oct 14), the fastest pace since November 1995.

That was higher than the 9.5 per cent gain in August, and exceeded the 10.5 per cent median estimate in a Bloomberg survey of economists.

The consumer price index rose 0.7 per cent in September from a year earlier, lower than a 0.8 per cent gain in the previous month. Economists had predicted the rate would be unchanged.

Surging coal prices and policy goals to cut energy consumption have led to an electricity shortage, resulting in power rationing and factory production halts in more than 20 provinces last month.

Prices of other commodities such as crude oil also continued to climb, with the Bloomberg Commodity Index rising 5 per cent for the month.

Inflation pressure will likely persist, with deadly floods in Shanxi province, China’s coal-producing region, sending coal futures to a record earlier this week.

To curb energy demand and make it profitable for power producers to increase supply, China announced it will allow electricity prices to rise further.

That, in turn, could push up consumer inflation by 0.4 percentage point by the third quarter of next year, according to an estimate by Nomura Holdings, although an official with the top economic planning body said on Tuesday the impact would be limited.

Consumer inflation remained in check by falling pork prices, even though the removal of most virus controls by the end of this month may have helped to boost household spending.

There are early signs that producers are starting to pass on higher costs to consumers: The largest soy sauce maker in the country said this week it plans to raise retail prices of its products.

Higher inflation, coupled with a weakening economy, have raised concerns of stagflation in China, and created more uncertainty about the outlook for monetary policy easing.

Many economists still expect the central bank to cut the reserve requirement ratio for banks to help spur liquidity in the economy.

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