Weak Consumption Is a ‘Major Problem' for China's Recovery, Says Analytics Firm

• Data released Wednesday showed a record gap between the speed at which producer prices and consumer prices are rising.
• "The major problem has been that the consumer's not all the way back," says Leland Miller, CEO of China Beige Book, a U.S.-based independent data and analytics firm.

Persistent weakness in Chinese consumption will prevent businesses from charging higher prices — even as production costs keep rising, says Leland Miller of China Beige Book International, a U.S.-based independent data and analytics firm.

"The most problematic dynamic of China's recovery — which overall has been very strong in the past year, year and a half — the major problem has been that the consumer's not all the way back," Miller, CEO at at the firm, told CNBC's "Squawk Box Asia" on Thursday.

Until there's a "reset" in household spending, businesses will not be able to raise prices much, he explained.

"This is essentially gonna be a problem on the production side and, you know, specifically the factory side."

Data released Wednesday showed that production costs were rising at a much faster pace than selling prices to private consumers, with a record gap between the producer price index and the consumer price index in May.

That hurts the amount of money manufacturers can make.

Official data on Wednesday showed China's producer prices surging 9% in May compared to a year earlier, the fastest since September 2008.

Miller said the inflation situation in China right now is "very focused" and centered on commodities, as well as factories which were being squeezed on cost.

"Yes, there's an inflation issue. Yes, it's gonna be tricky for some of the parties in China. But specifically … it's on the production side. It has not moved over to consumer side," he said. "It's a fairly specific problem in China right now, even if it's rather intense for the time being."

Covid impact on services, retail

Following an earlier success in curbing the spread of Covid-19, which was first reported in the Chinese city of Wuhan, China's economy was among the few in Asia that grew in 2020.

Still, the threat of the virus remains. A recent spike in infections in major city Guangzhou surrounding the Delta variant, which was first identified in India, has led to mass testing and lockdown of local areas.

"You're seeing a Covid problem that hasn't gone away," Miller said. "As long as Covid is there, you're gonna have pressure on services, you're gonna have pressure on retail."

Despite being "very stable," the services sector in China has failed to break out of its rut, he added.

"Every single that we see a month or two of stronger services, you know, it reverses itself," Miller said. "It has not been a driver of the economy and neither has retail."

"If you wanna see a healthier economy, or any type of normalcy like people talk about normalcies, you should see strong services, stronger retail and less reliance on manufacturing and commodities," he said.