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P&G, Unilever up China prices, fuel inflation fears

By Jason Subler and Melanie Lee

SHANGHAI (Reuters) - Consumer goods giants Procter & Gamble and Unilever will both raise detergent and soap prices in China by up to 15 percent next month, local media reported, underscoring the battle the government faces with 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 <ULVR.L> <UNc.AS> confirmed there will be price rises across its portfolio to offset hikes in raw material costs but did give details after the Shanghai Daily said they would be up to 15 percent. P&G <PG.N> 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.

Anglo-Dutch Unilever has said raw material costs will rise by 4 percent of its turnover in 2011 which analysts calculate as a rise of 12 percent as prices of vegetable oils, crude oil and packaging have risen sharply, but it hopes to offset these by rising its own prices and making cost savings.

Unilever has the highest proportion of sales from emerging countries, at 53 percent, compared to other big consumer goods groups and said it had a particularly strong year in China during 2010 with products such as Omo detergents, Clear and Dove shampoos, Rexona deodorants, Lipton tea and Wall's ice cream.

The group saw its fastest growth in 2010 from emerging markets despite tougher competition, and sees these areas as key as it aims to grow ahead of its market and push up margins.

Unilever Plc shares were up 0.5 percent at 1,895 pence by 1139 GMT in a slightly firmer London stock market.

Economists said they did not think the price rises would impact the government's fight against inflation significantly.

"I'm sure 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 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 China 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," he said.

Yi Yang, a deputy governor of the People's Bank of China, 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 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 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 transport.

Global commodity prices have risen sharply in the past year. Commodity prices, measured by the Reuters-Jefferies price index <.CRB>, 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, Ai Peng Soo in Shanghai and David Jones in London; Editing by Mike Nesbit)

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