Why China’s central bank is unlikely to cave in to inflation pressure from the commodities boom

For emerging markets, the inflation jump, while temporary, could put public pressure on central banks to raise interest rates

But Chinese policymakers see the commodity price surge as driven more by external factors, which cannot be directly mitigated by domestic policy tightening

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People walk along Nanjing Pedestrian Road, a main shopping area in Shanghai, on May 5. China’s core consumer price index, which excludes food and energy, grew just 0.7 per cent year on year in April. Photo: Reuters

Published: 2:30pm, 21 May 2021Updated: 10:31pm, 21 May 2021

Commodity prices, which had returned to pre-coronavirus levels by the end of last year, have gone on to rise by more than 20 per cent this year, according to the Commodity Research Bureau Index. The increase has been broad-based, affecting energy, industrial metals and agricultural prices.

In particular, iron ore and copper prices have surged to all-time highs, passing key levels of US$200 and US$10,000 per tonne respectively. The rapid price surges were driven by booming demand as the global economy recovered while supply remain constrained.

These higher commodity prices are already showing in the latest inflation signals. Consumer price indices have picked up across emerging markets since the start of the year.

Inflationary pressure from rising commodity prices is likely to be more of a concern for the central banks of emerging rather than developed markets, as inflation expectations tend to be less anchored in emerging economies.

Benign inflation since the start of the Covid-19 pandemic has enabled many emerging-market central banks to ease monetary policy significantly, in contrast to the policy tightening seen in previous crises.

BHP Billiton's Mount Newman iron ore mine in Western Australia is pictured in 2010. Iron ore and copper prices have surged to record highs this year. Photo: AFP/BHP Billiton

Why China’s central bank is unlikely to cave in to inflation pressure from the commodities boom

For emerging markets, the inflation jump, while temporary, could put public pressure on central banks to raise interest rates But Chinese policymakers see the commodity price surge as driven more by external factors, which cannot be directly mitigated by domestic policy tightening

For emerging markets, the inflation jump, while temporary, could put public pressure on central banks to raise interest rates

But Chinese policymakers see the commodity price surge as driven more by external factors, which cannot be directly mitigated by domestic policy tightening