Input prices jumped in Chinese and Indian factories in January, adding to pressure from food inflation that the fast-growing economies are already struggling to contain, business surveys showed on Tuesday.
But the purchasing managers' indexes (PMIs) in both countries should also give their governments the confidence to stay the course in monetary tightening, analysts said, with firms reporting a steady expansion of activity.
India's manufacturing sector grew at a slightly faster pace in January on the back of stronger production and order books. In China, tighter policy began to bite, producing a bigger-than-expected slowdown in manufacturing growth, though the country's factories were still well into expansionary territory.
But attention centered on the gauges of inflation in both countries' surveys, with data from South Korea also highlighting a run-up in prices.
In China, the input price sub-index in the official PMI rebounded to 69.3 in January from 66.7 a month earlier.
This is the data point that will likely be of most interest to policy makers. This provides a further reason to think that headline inflation is likely to pick up in the next few months, said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong.
In India, the input price index in the HSBC Markit PMI rose to 66.14 from 64.85 in December, climbing for the seventh straight month, and the output price index rose for the fourth month in a row.
Tight capacity yet again pushed up input and output prices at an accelerated pace, said Leif Eskesen, chief economist for India & ASEAN at HSBC.
In South Korea, inflation rose above the central bank target to hit a three-month high, while a measure of manufacturing input prices soared to a nearly two-year high, boosting the case for a rare back-to-back interest rate increase next week.
Inflation has hurtled to the top of the policy agenda in most developing countries, including China and India, where rising food costs have driven up broader prices and made it more urgent for central banks to tighten policy.
The increases in input price indexes reflected higher costs for raw materials and fuel reported by manufacturers. The surveys may, in fact, have under-stated the inflationary pressure because they were conducted before global oil prices surged in the final days of January after Egypt was gripped by unrest.
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 onto consumers, stoking concerns about the potential for an inflationary spiral.
China's official purchasing managers' index fell to a five-month low of 52.9 in January, the China Federation of Logistics and Purchasing said, missing the median forecast of 53.5 in a Reuters poll.
But analysts cautioned against reading too much into survey results for a single month, particularly as they were likely distorted by a closure of factories and a spike in consumption late in January ahead of China's Lunar New Year.
Underlining that warning, a separate PMI sponsored by HSBC pointed in the exact opposite direction from the official version, with its headline index edging up in January while its measure of input price inflation eased a touch.
Nevertheless, taken together, the two surveys painted a picture of sticky inflation and a moderate slowdown in the world's second-largest economy after 10.3 percent growth last year.
This will only reinforce the overriding theme of policy tightening to contain inflationary pressures, said Charlie Lay, economist at Forecast PTE in Singapore.
So far, Chinese officials have moved tentatively on rates and the currency, and instead leaned heavily on administrative measures, raising banks' reserve requirements seven times since the start of last year and capping their lending, while also cracking down on property speculation.
Consumer price inflation in China ran at an annual pace of 4.6 percent in December, slowing slightly from November's 28-month high of 5.1 percent.
Many economists believe inflation is set to accelerate again in January due to a spike in food demand and broader consumption ahead of the Chinese Lunar New Year, which begins this week.
The HSBC Markit Purchasing Managers' Index for India, based on a survey of around 500 companies, edged up to 56.8 in January from 56.7 in December.
That was the 22nd consecutive month the key index of manufacturing in Asia's third-largest economy has been above the reading of 50 that divides growth from contraction.
The manufacturing sector started the year out in style, with the growth momentum picking up a tad led by higher output as order books continue to thicken, reflecting, in particular, strong demand from domestic clients, said Eskesen with HSBC.
The survey's factory output index rose in the first month of 2011 from December but is still below its November nine-month high. Output has increased in every month since April 2009.
However, the expansion in the manufacturing sector did not influence the labor market recovery, with the PMI's employment index staying in contraction for the sixth time in the last seven months.
The Reserve Bank of India raised interest rates last week by a quarter of a percentage point to clamp down on resurgent inflation and warned of persistently higher food prices unless steps are taken to boost supplies.
Although the central bank has already raised policy rates seven times since March as the economy has revived from the global financial crisis, it said the balance of risks had tilted toward stronger inflation and it was ready to respond if price pressures increased.
(Additional reporting by Kevin Yao and Yoo Choonsik in Seoul; Writing by Simon Rabinovitch; Editing by Ken Wills and Vidya Ranganathan)