China, India PMIs show inflation pressures

By Kevin Yao and Yati Himatsingka

BEIJING/BANGALORE (Reuters) - Costs for Chinese and Indian factories jumped in February, pointing to a need for more measures to prevent inflation from undermining the world's two fastest-growing economies, surveys showed on Tuesday.

The February purchasing managers' indexes provide the latest evidence of the growing inflationary pressure from the sharp rise in commodity prices that was already apparent in a round of global PMIs covering the month of January.

Two China PMIs showed that manufacturing growth slipped to its slowest pace in at least six months in February, a sign that the government's campaign to tame inflation was biting.

But gauges of factory input prices hit three-month highs in both China's official PMI and a private-sector PMI sponsored by HSBC.

"It certainly supports our call for more interest-rate and reserve-ratio hikes, albeit less aggressive, in the near term," Mingchun Sun, economist at Daiwa in Hong Kong, said in a research note.

India's manufacturing sector expanded at its fastest clip in three months in February as new orders poured in, a PMI showed.

But at the same time, factory input prices rose at the fastest pace since the PMI records began in 2005. It also marked the index's eighth consecutive monthly rise.

India suffers from the highest inflation of any major Asian economy even after seven rate rises in a year. Although monetary policy can do little to control domestic inflation fueled by increases in global commodity prices, the risk is that the cost pressure will spread in the economy.

"Manufacturers are facing ever steeper increases in input costs, reflecting the tightness of labor markets and rising material costs, which will continue to add upward pressure on output prices." said Leif Eskesen, chief economist for India and ASEAN at HSBC, which sponsors the index.

In other PMIs, Russian manufacturing expanded in February at the fastest pace in three years as new orders growth quickened, prompting companies to step up hiring.

An Irish PMI had similar themes as the index showed the pace of factory activity at an 11-year high and Turkey's PMI hit a record high.

A February PMI covering the euro zone is due to be released around 0900 GMT and is expected to show factory expansion was steady from January.

However, growth in the U.S. manufacturing sector may have quickened modestly in February, data is expected to show at 1500 GMT.

OIL CONCERNS

Many of China's businesses were shut or running at half speed in the first part of February as Chinese celebrated Lunar New Year holidays, making it difficult to interpret the official index.

Still, Goldman Sachs said a downward trend since December in both of the Chinese PMIs, which are designed to provide a timely snapshot of conditions in the manufacturing sector, may indicate inflationary pressures will soon ease.

"Such a slowdown might have been contributed to by the tightening in financial conditions, welcome news since it will imply lower underlying inflationary pressures," Goldman Sachs economists Yu Song and Helen Qiao said in a research note.

Many economists believe that China may have passed the mid-point in its cycle of tightening monetary conditions, with some indications that price pressures are receding.

Since October, when inflation began to pick up, China has raised banks' required reserves five times to a record high, increased interest rates three times and also ordered banks to lend less.

"Inflation pressures are rising but economic activity is slowing. Slower economic growth is good for cooling inflation," said Wang Hu, economist at Guotai Junan Securities in Shanghai.

The rise in output price sub-indexes in both the Chinese and Indian PMIs suggested that manufacturers were trying to pass some of the rising costs on to consumers, stoking concerns about further inflationary pressures for consumers.

China's economy grew more than 10 percent in 2010 and India's economy is expected by the government to expand around 8.6 percent in the current fiscal year to the end of March.

That makes them major engines of growth at a time when the developed world is still struggling for traction following the global financial crisis.

Raw material costs have risen broadly with oil, several metals and grains all running at high levels, which if sustained could reduce demand and so slow economic activity around the world.

Both Brent crude and U.S. crude futures have risen this year to their highest levels since 2008 as public protests swept across North Africa and the Middle East against incumbent rulers, raising concerns about supply disruptions.

"I am concerned," Strauss-Kahn said during a visit to Panama. "The hike to something which is between $110 and $120 a barrel is something which may affect (growth) it last too long."

The World Bank's manager of global economics, Andrew Burns, said high oil prices lasting for a year or more could cut growth in developing economies by between 0.2 percent and 0.4 percent.

(Additional reporting by Koh Gui Qing; Editing by Ken Wills and Neil Fullick)