P&G, Unilever up China prices amid inflation worries

SHANGHAI (Reuters) - Consumer goods giants Procter & Gamble and UNILEVER (ULVR.LO)(UNA.AM) will both raise their prices on detergent and soap in China by up to 15 percent next month, local media reported, underscoring the challenges Beijing faces to rein in inflation.

Policy makers in the world's second-largest economy have been racing to contain consumer prices, which rose 4.9 percent in February from a year earlier, to prevent inflationary expectations from settling in and contributing to further rises in the prices of everything from broccoli to beer.

State television on Monday showed images of empty store shelves in some Chinese cities as residents raced to pick up P&G and Unilever products before the price rises went into effect, highlighting the sensitivity to prices of especially poorer Chinese people, who are hit hardest by inflation.

Unilever confirmed a report on the price rises by the English-language Shanghai Daily, which had said the rises were on account of rising raw materials costs, but declined to give additional details. P&G could not be reached for comment.

The two companies, which sell a variety of products including shampoo, bath lotion and toothpaste, have a significant portion of the consumer goods market in China according to past statements by executives.

But economists said they did not think the price rises would have a significant impact on the government's fight against inflation.

"I'm increasingly sure that there has been a lot of monetary policy tightening, and if that's the case, then inflation will start to come down," said Paul Cavey, an economist at Macquarie in Hong Kong.

"This doesn't really change our view on that, although it could make getting there a bit more difficult."

China does not publish the makeup of its consumer price basket, but bank economists estimate the "health, medical and personal products" category, within which consumer products fall, has a weighting of about 9.5 percent.

UNDER CONTROL?

China has raised interest rates and banks' required reserves multiple times in the past several months in an effort to tame inflation, which has stabilized at under 5 percent after hitting a peak of 5.1 percent in November.

Although food is the main driver of consumer price pressures, the government wants to prevent inflation expectations from growing. There are some signs its efforts are starting to take effect.

A central bank survey released this month showed more households were satisfied with current price levels and saw less chance of rising inflation.

A flash purchasing managers' index (PMI) from HSBC Markit last week showed that rises in factory input prices were their slowest in at least half a year and increases in output prices their weakest in seven months.

With overall rises in the prices of raw materials slowing from last year and Chinese monetary policy now tighter, Cavey said he thought Beijing could keep the situation under control.

"Now, commodity prices aren't rising so quickly, monetary policy has been tightened domestically. There is still some inflation, but the government is getting ahead of the curve. I'm not that worried about inflation in the second half of the year," he said.

Yi Yang, a deputy governor of the People's Bank of China (PBOC), said last week that China was facing strong price pressures but inflation in the second half of the year would be lower.

"So for the whole year, we will be able to meet the 4 percent goal," he told a business conference in Hong Kong, referring to the government's 2011 inflation target.

Still, policymakers are sensitive to rising prices, so on Monday required hospitals and clinics nationwide to cap the price of certain drugs.

Planned price rises by P&G, Unilever and other Western companies have also drawn the attention of the public and authorities.

Shanghai's Development and Reform Commission, the local planning body, is investigating the matter of P&G and Unilever raising prices, the Shanghai Daily said.

Earlier in the year, the economic planning agency fined Wal-Mart Stores and Carrefour SA for manipulating product prices.

McDonald's Corp also raised prices on its menu in China in November because of rising materials costs.

Western companies have raised prices elsewhere as well.

Earlier this month, P&G said it would raise its U.S. detergent prices by 4.5 percent in June in response to rising costs of raw materials, packaging and transportation.

China is not alone in feeling inflation pressures from raw materials prices.

Global commodity prices have risen sharply in the past year. Commodity prices, measured by the Reuters-Jefferies price index , reached their highest levels this year since 2008. The United Nations food agency has said global food prices hit a record high this year.

(Additional reporting by Gui Qing Koh in Beijing and Ai Peng Soo in Shanghai)