How should CPI and PPI continue to fall in January 2024?

Executive Summary:

In January 2024, the three major price indices continued to fall, and the decline in the consumer price index widened. Whether the continuous decline in prices is the impact of the high base of the staggered month of the Spring Festival or the impact of oversupply caused by insufficient demand is crucial to judging the economic situation. The continued decline in food prices, especially in the month leading up to the Chinese New Year, reminds us that we need to pay attention to the double contraction of income and purchasing power of the middle and low-income groups. To cope with the current economic deflation, it is necessary to promote the second reform and opening up, and at the same time directly send money to the people to promote consumption.

1. In January 2024, the three major price indices continued to fall, and the decline in the consumer price index expanded.

According to the price index released by the National Bureau of Statistics on the 29th of the Lunar New Year, in January 2024, our corporate demand and retail market demand continued to be weak before the Spring Festival, and the trend of oversupply continued to exist and became more serious, resulting in a continuous downward trend in prices.

In January 2024, the national consumer price (CPI) fell by 0.8% year-on-year, which is the fourth consecutive month of year-on-year decline in CPI, which has exceeded the standard of three consecutive months of decline in deflation observed by peers in the world. At the same time, the CPI also recorded the largest monthly year-on-year decline since the reform and opening up. Among them, the prices of consumer goods decreased by 1.7 percent and the price of services rose by 0.5 percent, while the prices of non-food goods rose by 0.4 percent and the prices of food decreased by 5.9 percent. Food prices also fell by the most in January since the reform and opening up.

What is even more unbelievable is that the hoarding of New Year's goods by residents before the Spring Festival every year has led to a sharp drop in the price of New Year's goods, which will inevitably increase in price. Among them, the price of pork fell by 17.3%, the price of beef fell by 7.7%, the price of mutton decreased by 5.9%, the price of aquatic products decreased by 3.4%, and the price of fresh fruit fell by 9.1%.

Compared to the previous month, the CPI rose by 0.3% month-on-month, with food prices rising 0.4% month-on-month, non-food prices rising by 0.2%, consumer goods prices rising by 0.2%, and service prices rising by 0.4%.

In January 2024, the national PPI fell by 2.5% year-on-year, although the decline was 0.2 percentage points narrower than the previous month, but this is the 16th consecutive month of year-on-year decline in PPI.

Among them, the price of means of production that flowed into other enterprises to continue production after leaving the factory fell by 3.0 percent, and the price of means of subsistence that flowed into the retail market after leaving the factory fell by 1.1 percent. In terms of classification, food prices decreased by 1.0 percent, clothing prices rose by 0.1 percent, prices of general daily necessities remained flat, and prices of durable consumer goods decreased by 2.3 percent.

Compared with the previous month, the PPI fell by 0.2% month-on-month in January, 0.1 percentage points narrower than the previous month. However, this is the third consecutive month of decline in PPI month-on-month.

Among them, the prices of means of production decreased by 0.2 percent month-on-month, the prices of means of living decreased by 0.2 percent, the prices of food decreased by 0.1 percent, the prices of clothing decreased by 0.2 percent, the prices of general daily necessities were flat, and the prices of durable consumer goods decreased by 0.4 percent month-on-month.

In January, the purchasing prices of industrial producers, which measure the balance between industrial demand and supply, fell by 3.4% year-on-year, although the decline was 0.4 percentage points narrower than the previous month, but this was the 12th consecutive month of year-on-year declines in industrial purchasing prices.

Among them, except for non-ferrous metal materials and wires, which rose by 1.5%, all other categories fell. The prices of building materials and non-metallic materials decreased by 7.0 percent, the prices of fuel and power decreased by 6.7 percent, the prices of agricultural and sideline products decreased by 5.8 percent, and the prices of chemical raw materials decreased by 5.7 percent, while the prices of ferrous metal materials remained unchanged.

Purchasing prices of industrial producers fell by 0.2% month-on-month, the same rate of decline as the previous month. Among them, the prices of agricultural and sideline products decreased by 1.0 percent, the prices of fuel power and chemical raw materials decreased by 0.8 percent, the prices of building materials and non-metallic products decreased by 0.1 percent, the prices of ferrous metal materials rose by 0.8 percent, and the prices of non-ferrous metal materials and wires rose by 0.3 percent.

Second, the continuous decline in prices, whether it is the impact of the high base of the Spring Festival or the impact of oversupply caused by insufficient demand, which is crucial to judging the economic situation.

When talking about the 0.3% month-on-month increase in CPI in January, the National Bureau of Statistics believes that this is due to the continuous increase in consumer demand due to the holiday effect; when it talks about the 0.8% year-on-year decline in CPI in January, it is said that it is affected by the high base of the Spring Festival in the same period last year; and when it comes to the PPI in January, which fell by 2.5% year-on-year and 0.2% month-on-month, the explanation is that it is affected by the fluctuation of international commodity prices. All in all, it is the influence of objective factors beyond the reach of manpower. It has nothing to do with monetary policy or economic measures.

However, after repeatedly studying the relevant data, Saburo believes that these reasons are superficial and there is not enough data to support them.

First, the month-on-month rise in CPI has nothing to do with the continuous increase in consumer demand in January 2024, but this is a purely seasonal factor affected by the holiday effect.

Yes, the Chinese New Year is always a special month in China to fully unleash its purchasing power. But on the one hand, it is more of a seasonal pattern, on the other hand, it is not related to the size of purchasing power before the Spring Festival, it should not be whether the CPI rises or falls month-on-month, but the magnitude of the month-on-month increase.

As we can see from the chart "Comparison of the Month-on-Month Increase in the Consumer Price Index from 2008 to January 2024" produced by the Bull Riding Institute, the CPI in January of all years has risen month-on-month. In the last 17 years, there have been 15 months when the CPI exceeded 0.4 month-on-month in January. Only in 2012 and 2024 will the CPI increase be 0.3% month-on-month. In other words, the month-on-month increase in CPI in January 2024 is tied for the lowest in January 2012.

If, as the National Bureau of Statistics said, consumer demand continued to increase in January, why did the month-on-month increase in CPI in January be the lowest in history?

Second, the year-on-year decline in CPI has no obvious correlation with the high base of the Spring Festival in the same period last year.

Another big feature of the month before the Spring Festival is that the purchasing power released before the holiday is concentrated on food and transportation. Returning home for the New Year is a rigid demand for transportation services before the Spring Festival; purchasing food-based New Year goods, especially meat, fish, and fruits, is also a characteristic of Chinese people eating and drinking during the New Year. Even if it is popular to eat New Year's dinner in a hotel, it is just that some food is transferred from family purchase to hotel purchase.

Due to the long duration of the centralized procurement of New Year's goods by families, enterprises and institutions, hotels and restaurants, historically, regardless of whether the Spring Festival is in January or February, the CPI and food prices in January have generally risen year-on-year. There is no comparable fact that the year-on-year price increase or decline caused by the "high base of the Spring Festival in the same period of the previous year" or "low base" can be compared.

We can see from the chart of "China's Consumer Price Index and the Rise and Fall of the Food Price Index from January 2008 to January 2024" produced by the Bull Riding Research Institute that historically, except for the CPI in January 2021 which fell by 0.3% year-on-year due to unstable supply and purchase during the epidemic and the food price fell by 1.8% year-on-year in January 2022, the CPI and food prices in January of all other years increased year-on-year.

Economics is also a science, and the conclusions drawn from economic analysis should stand up to verification.

The first day of the Lunar New Year in 2023 is on January 22, and in 2024 it is on February 10. If the 0.8% drop in CPI and the 5.9% drop in food prices in January 2024 are explained as the result of the "high base of the Spring Festival in the same period of the previous year", then it is impossible to explain why the CPI or food prices have risen significantly year-on-year in January of the other five years that have met this "high base of the Spring Festival" in the last 20 years.

Third, affected by the fluctuation of international commodity prices, the conclusion that PPI prices fell year-on-year is very reluctant.

Since 2023, the long-term trend of international commodity prices has been stable and declining, but due to the impact of Russia and Saudi Arabia jointly reducing production and maintaining prices and the Israeli-Kazakhstan war, international commodity prices have fluctuated greatly in the past two years, falling in some months and rising in others.

What's more, the impact of commodity prices is international and not just for our country. Judging from the factory price index of industrial products in China and the United States for more than a year, the mainland PPI fell by 2.5% year-on-year in January, the 16th consecutive month of year-on-year decline. The U.S. PPI rose 1% year-on-year last month and is expected to rise 1.1% this month, and has been rising year-on-year since the start of the Russia-Ukraine war.

From an objective and scientific point of view, it is natural that the PPI of two countries in the same international commodity market have different rising and falling trends, and it is natural that the sentence "affected by the fluctuation of international commodity prices" cannot be used to make conclusions. Among them, the more important influencing factor is the balance between the demand and supply of raw materials and industrial parts.

As a global factory, we are facing a decline in export orders and export value for several months, and the lack of demand in the consumer market and the shrinking demand for raw materials for production have led to a decline in the production price of industrial products, which is a logical explanation.

Third, the continuous decline in food prices, especially in the month before the Spring Festival, reminds us that we need to pay attention to the double contraction of income and purchasing power of the middle and low-income classes.

Saburo noticed three data phenomena that few people paid attention to that pointed to the same trend.

First, in January 2024, the prices of clothing, housing, daily necessities and services, education, culture and entertainment, medical care and other goods and services in the CPI all increased by different ranges year-on-year, only the price of transportation and communication fell by 2.4% year-on-year, and the price of food fell by 5.9%.

Second, food prices have continued to fall and the decline has widened since July 2023. It was down 1.7% year-on-year in July 2023, 4% year-on-year in October, and 5.9% year-on-year in January 2024. The year-on-year decline in food prices widened by 4.2 percentage points in seven months.

Third, the gap between the average disposable income of residents and the median disposable income has widened significantly, and the purchasing power of the middle and low-income strata has declined relatively in the current grim economic situation.

According to the quarterly disposable income data released by the National Bureau of Statistics, the year-on-year growth of average disposable income of residents has gradually accelerated in the last three quarters, with an increase of 5.8% in the second quarter, 5.9% in the third quarter and 6.1% in the fourth quarter. However, the growth rate of median disposable income has been getting lower and lower, shrinking from 5.4% in the second quarter to 5.3% in the fourth quarter, and the gap with the average has widened from 0.4 percentage points in the second quarter to 0.8 percentage points.

From a statistical point of view, if the median income growth is slower than the average, it means that the income of the high-income class is growing faster than that of the low-income class, and the gap between the rich and the poor is widening.

From an economic point of view, the lower the income, the greater the proportion spent on food. In other words, the increase in income has a greater impact on the demand for food, mainly low-income people.

Food prices in the mainland CPI have fallen year-on-year for seven consecutive months, which means that the demand for food is also contracting. The result will not be high-income groups such as Jack Ma and Lei Jun, but only 200 million flexible workers and 300 million to 400 million workers in private enterprises. In this economic downturn, they are the main shock targets.

Fourth, in response to the current economic deflation, it is necessary to promote the second reform and opening up, and at the same time directly send money to the people to promote consumption.

The CPI has been negative for several months in a row, which is the first time in decades since the reform and opening up. Saburo argues that there is no point in arguing whether the current situation is "deflationary" or not. Accurately grasping the economic situation and economic trends, and facing the general oversupply, insufficient demand, declining corporate profitability, declining employment opportunities, and declining residents' income and willingness to consume are the basis for us to formulate correct economic policies. If we fail to recognize this, or are unwilling to acknowledge these problems, our response may be ungrounded, which is a great macroeconomic irresponsibility.

In the face of the current complicated economic situation, I am afraid that it can no longer be solved by following the previous countercyclical adjustment, monetary easing policy, and increasing fiscal debt.

There are some problems in our macro economy, such as the debt problem of local government investment and financing platforms, and the real estate debt problem, which are indeed quite thorny and have begun to be revealed; such as the problem of decoupling and de-risking, the population problem, and the problem of demand shortage caused by the distribution system, which I have mentioned many times in the economic analysis articles in the past two years; affecting the effectiveness of monetary policy.

On the one hand, we must promote the second reform and opening up to be able to solve the above problems, and continue to cut the reserve requirement ratio and interest rates sharply to be effective.

On the other hand, we should be vigilant against the negative impact of the widening income gap on the low-income strata and stimulating consumption, and the fiscal policy should do something to stop and distribute money directly to the people from those large amounts of redundant investment and inefficient or even ineffective investment, so as to promote consumption and digest the excess supply.

[Author: Xu Sanlang]