The price trend in April is unsustainable, and the government's increase in people's livelihood prices pushes up the CPI, which will do more harm than good

Mars macroscopic

2024-05-12 06:30Published in Hunan Finance and Economics Creator

Executive Summary:

In April, consumer prices rose steadily, with CPI rising 0.3% year-on-year and 0.1% month-on-month. However, supply-side prices continued to fall: the ex-factory prices of industrial products fell by 2.5% year-on-year and 0.2% month-on-month. Overall, the price level in April was still in a downward channel. If the government adopts the method of raising energy and people's livelihood prices to artificially push up the CPI, it will do more harm than good.

1. Prices on the consumer side rose slightly steadily, with CPI rising 0.3% year-on-year and 0.1% month-on-month.

According to the price data released by the National Bureau of Statistics on Saturday, in April 2024, the national consumer price (CPI) rose by 0.3% year-on-year, an increase of 0.2 percentage points from March. Among them, food prices fell by 2.7 percent, consumer goods prices were flat, and service prices rose by 0.8 percent.

CPI rose 0.1% month-on-month in April, reversing the previous month's 1% month-on-month decline. Among them, food prices decreased by 1.0 percent, consumer goods prices decreased by 0.1 percent, and service prices rose by 0.3 percent.

In April, among the seven major categories of CPI, the prices of food, tobacco and alcohol fell by 1.4% year-on-year, and the prices of the other seven categories all increased year-on-year. Among them, the prices of other goods and services, education, culture and entertainment, and clothing rose by 3.8%, 1.8%, and 1.6% respectively, with a large increase. The prices of food, tobacco and alcohol and clothing fell by 0.7% and 0.1% respectively month-on-month, while the prices of housing remained flat month-on-month, and the prices of the other five categories all increased month-on-month. Among them, the prices of other goods and services, transportation and communications, and education, culture and entertainment increased by 2%, 1% and 0.5% respectively from the previous month, ranking among the top three.

2. Supply-side prices continued to fall: ex-factory prices and purchase prices of industrial products fell by 2.5% and 3% year-on-year respectively, and by 0.2% and .3% month-on-month.

In April, the national industrial producer price (PPI) fell by 2.5 percent year-on-year, 0.3 percentage points narrower than the previous month, and 0.2 percent month-on-month, 0.1 percentage point larger than the previous month. Among them, the price of means of production decreased by 3.1% year-on-year and 0.2% month-on-month. The price of means of subsistence fell by 0.9% year-on-year and 0.1% month-on-month.

In April, the purchasing prices of industrial producers fell by 3.0 percent year-on-year, 0.5 percentage points narrower than the previous month, and decreased by 0.3 percent month-on-month, an increase of 0.2 percentage points from the previous month.

From the perspective of PPI classification, except for the ex-factory prices of clothing and general daily necessities, which increased by 0.3% and 0.1% year-on-year respectively, the prices of the other five categories decreased year-on-year. Among them, the prices of extractive industries fell by 4.8 percent year-on-year, the prices of raw materials decreased by 1.9 percent, the prices of processing industries decreased by 3.6 percent, the prices of food decreased by 0.8 percent, and the prices of durable consumer goods decreased by 1.9 percent.

Prices in extractive industries fell by 1.0 percent month-on-month, raw material industry prices rose by 0.3 percent, and processing industry prices fell by 0.4 percent. Among them, food prices fell by 0.1 percent, clothing prices were flat, general daily necessities prices rose by 0.3 percent, and durable consumer goods prices decreased by 0.5 percent.

In addition to the increase of 0.3% in raw materials and general daily necessities, and the price of clothing, the ex-factory prices of the other four categories fell month-on-month, of which the price of mining fell by 1%, the price of daily consumer goods fell by 0.5%, the price of processing industry fell by 0.4%, and the price of food fell by 0.1%.

3. On the whole, the price level in April was still in a downward channel.

The price index is the most core comprehensive indicator to evaluate the macroeconomic situation. In a purely market economy, employment improves, jobs increase, demand improves, supply exceeds demand, prices rise; Investment growth outpaced demand growth, supply expanded faster than demand, prices fell, oversupply, businesses laid off workers, unemployment increased. This is the basic logic of prices for the macroeconomy.

In semi-market and semi-planned economies with a high degree of government control, because the prices of important resources in the upstream and many important livelihood prices in the downstream are detached from market supply and demand factors and are mainly controlled by the government, the transformation of supply and demand in the macroeconomy, the strength of demand and the tightness of supply may have a less timely impact on prices, and the judgment of pure price signals on the macroeconomy may be distorted.

However, we need to pay attention to the fact that if we look at the price signals comprehensively, we can still observe some fragments of the state of macroeconomic operation.

Most of the media gave a more positive interpretation of the price situation in April. What consumer demand continues to recover, the trend of price recovery is obvious, and the economic recovery is warm. What consumption-driven recovery is moving from demand to production has laid the foundation for a strong recovery, adding more positive signs to economic performance. For example, Zhou Maohua, a macroeconomic researcher at China Everbright Bank, said that "the price data shows that domestic demand is recovering, supply and demand continue to improve, and the prospects for domestic demand and price recovery are optimistic."

Saburo believes that these observations and evaluations lack sufficient basis, and it is too early to say them. In fact, prices in April were still in a downward channel.

First, from the perspective of the comprehensive price change trend including the production side and the consumption side, the slight increase in CPI has not changed the trend of deflation.

We know that in the first quarter we had a 5.2% year-on-year increase in comparable GDP, but only 3.96% in current prices. From this, the price contraction coefficient of GDP can be calculated to be 98.82%, that is, the composite price fell by 1.18%. However, the CPI released by the National Bureau of Statistics in the first quarter was flat, neither rising nor falling. Why? Because GDP is made up of the value added of production and retail, the PPI fell by 2.7% in the first quarter. And house prices are also falling.

Based on April's CPI and PPI data, the Bull Riding Institute's simulated composite price index for April fell by 0.5% year-on-year and 0.1% month-on-month. Since the National Bureau of Statistics does not publish a house price index, all of these simulated composite price indices are somewhat underestimated compared to the actual price decline. For example, in the first quarter, the simulated index fell by an average of 0.8%, which is a one-third lower than the actual 1.18%.

From this point of view, although consumer prices have risen for the third month in a row, our price level is still in a deflationary channel because supply-side prices and property prices continue to fall.

Second, the year-on-year increase in CPI in April expanded slightly, mainly due to the base period effect.

On a year-on-year basis, the CPI increase in April this year rose by 0.2 percentage points compared with March. However, in-depth observation shows that this is not caused by the price increase in the current period, but mainly due to the tail-end effect of the sharp decline in the price index in the base period.

From the perspective of the base period, the CPI in April 2023 rose by 0.7% year-on-year from March to 0.1%, rebounded to 0.2% in May, fell to 0 in June, and fell 0.3% in July.

Therefore, from the perspective of this period, the year-on-year increase in CPI rebounded by 0.2 percentage points, but the month-on-month increase was only 0.1% seasonally.

Third, the year-on-year increase in CPI in April expanded, and the year-on-year decline in PPI narrowed, and the government's regulatory factors outweighed the market drivers of supply and demand.

Non-food prices in the CPI rose by 0.3% in April, mainly due to the holidays, with significant increases in prices including airfares, train tickets, car rentals, hotels and travel products.

Rising prices for utilities are another potential driver. As the financial pressures faced by some local governments have affected the subsidies available to utility operators, this has forced them to pass on the additional costs to their families to make ends meet.

Among the ex-factory prices of industrial products, most categories fell month-on-month, and a few rose month-on-month, with the largest increase in oil and gas rising by 3.4% month-on-month, and the retail price of transportation fuel in the CPI also rose by 2.9% month-on-month.

Among these rising factors, the prices of airfares, train tickets, tickets, utilities such as water, electricity, oil and gas, and raw materials are largely controlled by the government rather than driven by the market.

Fourth, the CPI recovery in April is not the result of improved demand, so it is difficult to sustain.

Prices are a reflection of supply and demand. Did demand improve in April?

According to the retail sales of automobiles released by the Passenger Car Association, the retail sales of the domestic narrow passenger car market in April were 1.532 million units, down 5.7% year-on-year and 9.4% month-on-month.

In April, the TOP100 real estate companies announced by the China Index Research Institute achieved a sales volume of 312.17 billion yuan, a decrease of 12.9% month-on-month and a year-on-year decrease of 44.9%, and the scale of monthly performance remained at a historically low level.

According to the data center of the Ministry of Culture and Tourism, during the May Day 5-day holiday in 2024, the total number of domestic tourism trips nationwide will be 295 million, a year-on-year increase of 7.6%. However, per capita tourism expenditure only recovered to 88.5% of the same period in 2019 (on a comparable basis). After adjusting according to the number of tourists and the number of holiday days, the daily per capita consumption of the May Day holiday in 2024 is only 113 yuan, which is not only lower than the 151 yuan in the same period in 2019, but also lower than the five major holidays since the Dragon Boat Festival in 2023.

These typical data show that the current macro economy is still facing serious challenges such as insufficient purchasing power, consumption downgrade, and oversupply, and more support is needed to boost consumption.

As a result, the temporary recovery in retail prices is likely to be unsustainable, as the decline in PPI and industrial purchase prices suggests that upstream factory activity is cooling, car sales for upgraded consumption are sluggish, and the protracted housing crisis shows no signs of abating. Constrained by these factors, effective demand is still insufficient, and the recovery of CPI, which is greatly affected by seasonality, is difficult to sustain.

Fifth, if the government adopts the method of raising energy and people's livelihood prices to artificially push up the CPI, it will do more harm than good.

Policy-based price adjustments will not only distort market signals, but also exacerbate the current situation of underconsumption and oversupply.

We all know that the middle class and the affluent class are the part of the population that is keen on investment, stocks, bonds, real estate, calligraphy and painting, and antiques are the main places where their income pays for a small amount of living expenses. However, the decline in asset prices will inevitably lead to the shrinkage of their wealth, and their investments will not only fail to increase in value, but will be harvested by the market.

Low- and middle-income earners and the poor, most or all of their income, need to be used to cover the basic cost of living. Therefore, the government-led price increase of daily necessities is actually squeezing their originally shy wallets, significantly increasing the living burden of these people and increasing their survival pressure.

At present, we are in such an economic environment that is not conducive to the accumulation of wealth of the rich and middle class, nor is it conducive to the improvement of the lives of the poor, because the prices of houses, cars, pianos, antiques, famous wines, calligraphy and paintings, jewelry, capital markets, etc., are all falling in price. However, daily consumption such as natural gas, tap water, gasoline, high-speed rail tickets, and property fees are all rising.

Such a structural price change would be more damaging to the macroeconomy than simple deflation.

On Friday, the central bank said in its quarterly monetary policy report that it would implement a flexible, precise and effective monetary policy to promote a moderate recovery in consumer prices and consolidate the economic recovery.

In fact, policymakers are well aware that the lack of effective demand is the main reason for the decline in prices. Then, to strengthen expectation management, what is needed is to increase consumer income and improve the level of social security, rather than continuing to increase loans or even directly raising the prices of daily necessities when the debt of households and enterprises is at its peak.

[Author: Xu Sanlang]

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Personal opinion, for reference only