Wencai Xin Research Institute macro team
Wu Chaoming Li Mo
Key takeaways
1. Non-food is the main reason for the rebound in CPI growth. In terms of food, the month-on-month decline in prices narrowed to -1%, which was similar to the historical average for the same period, and the year-on-year downward effect of food on CPI was basically the same as that of the previous month. In terms of non-food products, the Qingming holiday pushed service prices to recover to the level of the same period in history month-on-month, and the recovery of international commodity prices such as gold and crude oil supported the prices of related consumer goods, and the pull-up effect of non-food on CPI increased by 0.2 percentage points year-on-year, contributing to the total year-on-year increase in CPI. However, the core CPI is still in the "0" era, and the recovery of domestic demand is still slow.
2. It is expected that the CPI will grow by about 0.2% in May, and the central point will rebound to about 0.2% in the second quarter. The month-on-month decline in food prices is expected to narrow in May; Second, it is expected that pork prices will rebound moderately year-on-year under the effect of a low base in the same period last year; Third, the rebound of the domestic economy and the moderate recovery of demand in the service sector will form a certain support for non-food prices; Fourth, it is expected that the low base of oil prices will still support the year-on-year growth of non-food products; Fifth, the CPI tail factor increased by 0.2 percentage points in May.
Third, the low base supports the narrowing of the decline in PPI, but the recovery of domestic demand is weak. Affected by the significant weakening of the drag effect of the tail factor, the year-on-year decline in PPI narrowed in April, but the month-on-month decline in PPI expanded, and the contradiction between weak recovery of domestic demand and sufficient supply was further highlighted. In terms of industries, the prices of crude oil chain and black chain have risen and fallen, and the imported pressure has increased, but the constraints of the domestic real estate downturn on the price recovery cannot be ignored.
Fourth, it is expected that the decline in PPI in May will narrow to -1.6%, and the decline may gradually narrow during the year, but there is a high probability that the negative growth will continue throughout the year. First, the tail factor of PPI in May increased by 0.9 percentage points compared with April; second, due to the Fed's expectation of interest rate cuts and the great uncertainty of the geopolitical situation, the probability of high crude oil prices in May is on the high side; Third, the policy will support domestic industrial product prices in the short term, but the rebound momentum is constrained by the real estate downturn. It is expected that with the joint support of the low base effect and the recovery of demand, the decline in PPI will continue to narrow during the year, but it will take time for the domestic vitality to return, and there is a high probability that negative growth will continue throughout the year.
5. Summary: International import pressure, moderate recovery of the domestic economy, and low base jointly supported the year-on-year growth rate of CPI and PPI to rebound slightly in April, but the domestic economic recovery is still slow, and the clamping effect of weak economic links on prices is prominent. Looking ahead, it is expected that the policy will drive a moderate recovery of domestic demand, but the pressure on domestic supply is still large, the rebound of inflation is likely to be moderate, and the pattern of low inflation will be difficult to change during the year.
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Events: In April, the national consumer price index (CPI) rose 0.1% month-on-month and 0.3% year-on-year, an increase of 0.2 percentage points from the previous month, while the industrial producer price index (PPI) fell 0.2% month-on-month and 2.5% year-on-year, a decrease of 0.3 percentage points from the previous month.
1. Non-food is the main reason for the rebound in CPI growth, which is expected to increase by about 0.2% in May and will rebound moderately within the year
The decline in food prices is comparable to the same period in history and has little impact on the year-on-year CPI. From the perspective of food, the month-on-month decline in food prices in April narrowed by 2.2 percentage points to -1.0%, which was basically the same as the historical average for the same period from 2013 to 2023, and the year-on-year decline was the same as that of -2.7% in the previous month, affecting the CPI to decline by about 0.49 percentage points, which was basically the same as the previous month (see Figure 1). Among them, pork prices turned from a month-on-month decline of 6.7% to a flat month, and a year-on-year decrease of 2.4% to an increase of 1.4%, which increased by 0.05 percentage points year-on-year on the CPI compared with the previous month. The month-on-month decline in fresh vegetable prices narrowed by 7.3 percentage points to 3.7%, and the year-on-year decline from 1.3% turned to an increase of 1.3%, which increased by 0.06 percentage points year-on-year on the CPI compared with the previous month.
A combination of the recovery in demand for services and imported factors pushed up non-food prices. Non-food prices increased by 0.9% year-on-year in April, an increase of 0.2 percentage points from the previous month (see Figure 4), and the year-on-year pull up of CPI increased by 0.2 percentage points from the previous month, which was the main support for the moderate year-on-year recovery of CPI this month. In terms of sub-items, the recovery in demand for services and the rise in international commodity prices were the main reasons for the recovery in non-food prices. First, due to the impact of the Qingming holiday, service prices in April recovered to around the average of the same period in history, and the upward effect of service prices on non-food products remained stable. For example, service prices rose 0.3% month-on-month in April, the same rate as the 2011-19 average (see Figure 5). Second, affected by the rise in international gold prices and oil prices, other goods and services and transportation fuels increased by 2.0% and 2.9% month-on-month respectively in April, and the year-on-year increase also expanded accordingly, strengthening the supporting role of non-food products.
The core CPI continues to be in the "0" era, and a moderate recovery is expected in the future. In April, the core CPI, which excludes food and energy, increased by 0.7% year-on-year, an increase of 0.1 percentage points from the previous month, continuing to be in the "zero" era. Among them, service prices were flat year-on-year from the previous month, and the price increase of industrial consumer goods excluding energy expanded by 0.3 percentage points to 0.4%, which was the main support. Looking ahead, there is still a lot of room for the demand recovery of the service industry, and the moderate recovery of domestic demand is also expected to be transmitted to the price side, and the core CPI will stabilize and rebound in the future is a high probability event, but the smooth circulation of residents' "employment-income-consumption" is still facing obstruction, and it is expected that the slope of the core CPI will rise slowly in the future.
CPI is expected to increase by around 0.2% year-on-year in May 2024. First, it is expected that the month-on-month decline in food prices will narrow in May. According to the data of the Ministry of Agriculture, as of May 10, the prices of 28 key monitored vegetables, 7 key monitored fruits and pork increased by 0.4%, -0.8% and -0.4% respectively month-on-month, and the price of fresh vegetables turned from a sharp decline to a slight increase, the price of pork turned from rising to falling, and the price of fruits maintained a slight downward trend, so it is expected that the month-on-month decline in food in May will be narrowed. Second, pork prices are expected to remain weak in the short term, but the base in the second quarter of last year was flat and low, which is conducive to the rise of pork prices in May; Third, the rebound of the domestic economy and the moderate recovery of demand in the service sector will form a certain support for non-food prices; Fourth, although international oil prices have fallen at a high level, the support of a low base is strong, and it is expected that oil prices will still play a strong supporting role in non-food products in May; Fifth, the tail factor of CPI in May was 0.1%, an increase of 0.2 percentage points from April (see Figure 6).
It is expected that the CPI will be in a positive growth stage during the year, and the overall recovery will be moderate. For example, non-food prices, which account for a large proportion of the CPI, increased by 0.7% year-on-year in the first quarter, unchanged from last year, reflecting a steady recovery in activities such as the service sector. With the intensification of macro policies and the recovery of the demand side during the year, prices are expected to rebound as a whole, from 0.0% in the first quarter to about 0.2% in the second quarter.
Second, the low base supports the narrowing of the decline in PPI, but the recovery of domestic demand is weak, and PPI is expected to grow by about -1.6% in May
In April, the producer price (PPI) fell by 2.5% year-on-year, a decrease of 0.3 percentage points from the previous month, of which the drag effect of the tail factor was weakened by 0.5 percentage points from the previous month, which was the main contribution to the narrowing of the decline. Affected by the continued recovery of industrial production but the weak recovery of some domestic demand, PPI fell by 0.2% month-on-month, an increase of 0.1 percentage points from the previous month, and the drag on PPI by new price increases increased. In terms of structure, the means of production and means of subsistence decreased by 3.1 percent and 0.9 percent year-on-year respectively, and the decline rate narrowed by 0.4 and 0.1 percentage points respectively. From a month-on-month perspective, the means of production decreased by 0.2% month-on-month, the month-on-month decline in the mining and processing industry expanded, and the raw material industry was flat from 0.3% in the previous month, with a strong drag effect on the upstream and downstream; The month-on-month decline in means of living was flat at -0.1% in the previous month, the prices of food, clothing and general daily necessities were flat or rebounded month-on-month, and only the prices of durable consumer goods fell month-on-month, indicating that the consumer demand for durable goods has fallen in the context of weak terminal demand (see Figure 8).
From the perspective of the industry, the prices of crude oil chain and black chain have risen and fallen, reflecting the difference in the resilience of domestic and foreign demand. First, affected by the rebound in the prices of crude oil, non-ferrous metals and other commodities in the international market, the prices of crude oil chain and non-ferrous chain industries have rebounded. For example, the price of oil and gas extraction, non-ferrous metal rolling industry, and non-ferrous metal mining and dressing industry all recorded positive growth month-on-month, and the increase ranked high. Second, due to the abundant supply, but the sluggish demand for real estate, the ferrous metal mining industry, coal mining industry, ferrous metal processing and rolling industry, non-metallic minerals and other industries all recorded negative growth month-on-month, and the decline has expanded. Third, affected by the slow recovery of domestic demand, the prices of most middle and downstream industries also recorded a slight negative growth month-on-month.
PPI growth is expected to be around -1.6% in May 2024. First, the tail factor of PPI in May increased by 0.9 percentage points compared with April (see Figure 10); second, due to the Fed's expectation of interest rate cuts and the still great uncertainty in the geopolitical situation, the probability of high crude oil prices in May is high; Third, the policy will support domestic industrial product prices in the short term, but it will still take time for real estate demand to return, and the upward movement of domestic industrial product prices should not be overestimated.
The decline in PPI is expected to gradually narrow, and there is a high probability of negative growth throughout the year. It is expected that the low base effect, the escalation of the geopolitical situation, and the forward force of the policy will continue to narrow the PPI decline, and it is expected that the PPI center in the second quarter will be around -1.7%, and the decline will be narrowing month by month, but the constraints of sluggish real estate demand and slow recovery of the domestic cycle are strong, and the rebound of the new PPI price increase factor is limited. The probability of negative growth throughout the year is on the high side, and the pattern of low inflation will not change.
Third, the negative scissors gap between PPI and CPI narrowed slightly, and it is expected to continue to narrow in the future
The scissor difference between PPI and CPI reflects to some extent the change in the profitability of industrial enterprises. The widening of the scissor gap between the PPI and CPI usually means a continuous repair of corporate profits and economic momentum, and vice versa (see Figure 11-12). The expansion stage is mainly driven by the rise in the price of upstream raw materials, with significant structural characteristics, not a comprehensive price increase, and the corresponding decline stage is mainly dominated by a high base, and the price increase driven by the recovery of domestic demand is not obvious. In the case of weak recovery of domestic demand, the ability of the middle and downstream industries to pass on costs is still weak, resulting in the rise of upstream raw materials on the middle and downstream profits of the crowding out of a strong effect, which in turn suppresses the willingness of the middle and downstream enterprises to invest in production expansion, which is not conducive to the recovery of domestic economic momentum.
The scissors gap between PPI and CPI narrowed slightly to -2.8% in April from -2.9% in the previous month, which formed a certain support for the improvement of industrial enterprises' profits. Looking ahead, affected by factors such as the rebound in domestic demand, the forward force of policies, and the persistence of global energy supply-side shocks, it is expected that CPI and PPI are expected to continue to rise in the future, and the negative scissors gap between the two will continue to show a narrowing trend, and the drag on the profits of industrial enterprises is expected to continue to weaken.
This article originates from the world of finance