Good morning.

China announced this morning that its factories managed to raise their prices in year-on-year terms for the first time since 2012. The news has lifted global stock markets and the Chinese currency (the latter of which could do with a rest after a bad week).

For a couple of years, China’s producer prices had been running at annual declines of 6%, as the country dealt with the after-effects of over-investment at the start of the millennium. Many suspected the figures were understating the problem even then. Given that China’s factories essentially set global prices in so many sectors these days, given that the government’s efforts to rein in overcapacity appear to be gaining traction slowly, given that the country is losing its ability to undercut its neighbors on labor costs, and given that oil prices appear to have bottomed (or at least can’t fall by another 50% from this year’s levels) it ought logically to follow that producer prices across the world should be trending higher in due course. As it is, the PPI is still clearly negative in the U.S. (-2% on the year in August), Eurozone and Japan, which account for most of the world’s industrial output.

Higher producer prices should, in turn, feed through into higher investment, as companies gain more confidence that investments will pay for themselves. Higher consumer prices should also follow and then, at last, a return to interest rates more in line with a recovery that is already mature.

It’s been a long haul, but the light at the end of the deflation tunnel may not, this time, be an oncoming train. What can possibly go wrong?

Enjoy the weekend, and thank you for your patience with me this week. Alan aims to return on Monday.

Geoffrey Smith