Source: Zhao Wei Macro Exploration
Authors: Zhao Wei, Yang Fei, Ma Jieying (Zhao Wei is the Chief Economist of Kaiyuan Securities and a director of the China Chief Economist Forum)
Report highlights
With the acceleration of the accumulation of pressure on the cost side, some commodities have raised prices one after another, resulting in increased price transmission discussions. PPI to CPI, what is the truth behind it, and how will it be interpreted in the future? The combing based on history can be used for reference.
Under the traditional cycle, the smooth transmission of ppi to CPI is only the appearance, and both trends are the result of demand-driven
Under the traditional cycle, the cyclical fluctuation of prices is a lagging manifestation of cyclical changes in the economy; the leading lag relationship between different price indicators is not absolute. Under the traditional cycle, the cyclical fluctuations of the economy are mainly driven by the demand side, and prices, as a lagging indicator of the economy, show obvious cyclical fluctuations. Experience shows that common price indicators such as ppi and cpi are generally similar to economic trends, generally lagging behind the economy for about 2 quarters. PPI is weakly ahead of CPI, but not absolutely; in some cases, the two show synchronization characteristics, or PPI lags slightly behind CPI.
Under the traditional cycle, the leading lag relationship between PPI and CPI reflects the transmission of cyclical characteristics of the economy at the industry level. PPI is more affected by upstream raw material price trends, while CPI is more affected by downstream consumer goods and service prices. Under the traditional cycle, economic performance is greatly affected by demand policies, and each round of policies supports the infrastructure and real estate chains first, the midstream of the industrial level benefits first, and the upstream and downstream follow. Reflected in the price level, the PPI change that is greatly affected by the middle and upstream prices is earlier, while the CPI change driven by terminal demand is slightly lagging behind.
The main driving force of current price changes is on the supply side, and the divergence between PPI and CPI has obvious structural characteristics
Different from the traditional cycle, in recent years, price changes have been greatly affected by the supply side, and the trends of ppi and CPI have diverged many times, and the supply-side reform and The african swine fever stage are typical. From the second half of 2016 to the first half of 2017, the ppi rose sharply, and the CPI fell back to less than 1%, mainly due to the large fluctuations in the middle and upper reaches of the supply-side reform, the pig cycle peaked, etc., dragging down food; on the contrary, from 2019 to the first half of 2020, the ppi entered the deflationary range, and the cpi quickly broke through 5%, which was related to the sharp contraction of pork supply under African swine fever and the sharp rise in pig prices.
Changes in the supply and demand structure make the changes in the current round of ppi and cpi different from the traditional cycle and supply-side reform. Similar to the supply-side reform stage, since the beginning of 2021, the PPI has risen rapidly and hit a record high, while the CPI has fallen back to less than 1%. However, the rise of this round of PPI is not only due to the price increase of upstream products brought about by the contraction of domestic supply such as steel; the impact of upstream raw materials such as crude oil and copper and midstream products such as chips is also very significant. After the epidemic, the decline in residents' income and consumption willingness has inhibited terminal demand to a certain extent.
Driven by different factors, price deduction is not a simple cycle of history, and the phenomenon of structural inflation may be further highlighted
Under the decline of supply elasticity, the prices of some globally priced commodities are easy to go up and down, and the PPI may still be at a high level in the next 2 quarters or so; with the easing of domestic supply and demand contradictions, the downward trend of PPI tends to accelerate. After continuous capacity contraction, the current supply elasticity of major commodities is less than in the past; with the accelerated recovery of global offline activities, the demand for travel such as aviation has been repaired, further increasing the pressure on the price of commodities such as crude oil. Domestic coal and other supply ease, demand fell, PPI or peaked down, neutral scenario under the 2022 mid-hub or around 3%, the end of the year into deflation.
With the acceleration and dominance of cost-side pressure and the rise of the cpi center in 2022, the pressure in the first half of the year is relatively controllable, and the second half of the year is easy to exceed expectations. The price increase of consumer goods directly related to raw materials and strong cost pass-through ability has long been reflected in CPI. Under the weak demand and rising costs, the supply of some industries has contracted and accelerated the clearance; once the terminal demand is repaired, the price increase pressure may be further released. Under the neutral scenario, taking into account cost transmission, pork prices, service price replenishment, etc., the annual CPI inflation rate is low before and after high, the center or around 2%, the high point is close to 3%.
Risk warning: The energy crisis has intensified, and the clearance of pig production capacity has accelerated.
The body of the report
1. Under the traditional cycle, the smooth transmission of ppi to cpi is only a symptom, and both trends are the result of demand-driven
Under the traditional cycle, the cyclical fluctuation of prices is a lagging performance of cyclical changes in the economy, and the leading lag relationship between different price indicators is not absolute. Under the traditional cycle, the cyclical fluctuations of the economy are mainly driven by the demand side, and prices, as a lagging indicator of the economy, show obvious cyclical fluctuations. Experience shows that common price indicators such as ppi and cpi are generally similar to economic trends, generally lagging behind the economy for about 2 quarters. PPI growth rates are mostly weakly ahead of CPI, for example, 1998-2002, 2002-2006; in some periods, the two show synchronization characteristics, such as 2008-2009; or pppi lags slightly behind CPI, such as 2006-2008.
The leading lagging relationship between PPI and CPI is related to the traditional debt-driven growth model of real estate and infrastructure under the leadership of policies. In the traditional cycle, macro policies often iron out economic fluctuations by adjusting aggregate demand such as money and finance, and typical periods such as 2008-2009 have adopted loose monetary policy and active fiscal policies to expand total economic demand, repeatedly cut RRR and interest rates, cancel credit constraints, and increase infrastructure investment. In addition to the aggregate demand policy, the real estate policy is also closely related to the economic cycle. Therefore, whenever the policy is supported, each round of policy support, infrastructure and real estate chains are the first to improve, the price of industrial products at the production end is the first to benefit, and the impact on PPI is more direct, which is manifested in the rebound in the growth rate of infrastructure and real estate investment often drives PPI upwards.
The leading lag changes in PPI and CPI reflect the transmission of cyclical characteristics of the economy at the industry level. Under the traditional cycle, investment drive is the main logic of economic demand, but there is a significant time difference between investment on the upstream, middle and downstream effects. For example, investment increased first increased the demand for equipment, so that the middle and upstream industries took the lead in benefiting, which was manifested in the fact that the year-on-year growth rate of the midstream and upstream ppi was much earlier than the bottoming out of the downstream industry; and the cpi trend was more affected by the downstream consumer manufacturing category, and when the economy stabilized and recovered, the price increase was transmitted to the middle and lower reaches and the consumer end.
2. The main driving force of the current price change is on the supply side, and the divergence between ppi and cpi has obvious structural characteristics
Since 2020, the new round of price changes has also been significantly affected by supply, not only domestic supply, but also overseas supply. Since the end of 2020, the PPI has risen sharply by more than 14 percentage points, mostly contributed by black and oil chains. Among them, the domestic double carbon target superimposed investment in mining construction has greatly increased the willingness to suppress the capacity expansion of coal enterprises, and the coal supply has shrunk significantly; the gap between supply and demand has pushed the price of thermal coal to a new high, once exceeding 2590 yuan / ton. Not only domestic supply, some internationally priced commodities have also experienced a round of capacity contraction and price soaring stage, for example, under the significant reduction of capital expenditure, the production capacity of traditional energy products such as iron ore and crude oil has fallen sharply, and the gap between supply and demand has continued to widen (for details, participate in "Steel Soaring, Refracting the Global Inflation Context", "Global Energy Crisis, This Time Is Not The Same?). 》）。
Under the weakening of supply elasticity, the recovery of overseas demand has accelerated the rise of raw materials and pushed up domestic PPI, while domestic demand has suppressed CPI. Under the acceleration of vaccination, overseas economic repair supports the upward price of commodities such as crude oil, drives the price of related domestic industrial products, and pushes up the PPI, for example, the rise in oil prices has led to a new high in ppi oil exploitation, petroleum processing, chemicals and other related sub-items. Compared with the price increase of raw materials caused by the contraction of supply, under the repeated epidemics, the weak domestic consumer demand has suppressed CPI to a certain extent, the growth of catering consumption is almost zero, and other offline activities such as hotel accommodation have similar situations, dragging down CPI services, etc. (for details, see "In 2022, will CPI inflation exceed expectations?"). 》）。
3. Under the different driving conditions, the deduction of prices is not a simple cycle of history, and the phenomenon of structural inflation may be further highlighted
Changes in the supply and demand structure make the changes in the current round of ppi and cpi different from the traditional cycle and supply-side reform. Similar to the supply-side reform stage, since the beginning of 2021, the PPI has risen rapidly and hit a record high, while the CPI has fallen back to less than 1%. However, the rise of this round of PPI is not only due to the price increase of upstream products brought about by the contraction of domestic supply such as steel; the impact of upstream raw materials such as crude oil and copper and midstream products such as chips is also very significant. After the epidemic, the decline in residents' income and consumption willingness has inhibited terminal demand to a certain extent (for details, see "Underestimated Inflation Transmission").
Unlike in the past, after continuous global capacity contraction, the supply-side elasticity of major commodities is currently smaller than in the past, resulting in the price of related products being easy to go up and down. Since 2010, while the steel industry such as the United States and Europe has significantly reduced production capacity, the global iron ore mining industry has also experienced a capital expenditure reduction cycle of more than ten years; long-term "supply-side" reform, superimposed new ore mining takes a long time, etc., making the future capacity elasticity or be significantly compressed, and the price of related products is easy to go up and down. Similarly, domestic coal, steel and other upstream industries have also experienced a process of backward capacity elimination, taking coal as an example, between 2016 and 2018, the elimination of backward production capacity of 810 million tons, higher than the planned 550 million tons; while the production capacity withdrew from the plan, the new production capacity did not increase significantly, resulting in a significant decline in supply elasticity.
With the "flu" of the global epidemic and the acceleration of normal economic activities, the repair of offline services represented by air travel may also increase the pressure on the price of crude oil. Crude oil price changes are directly affected by the supply and demand pattern, the trend direction is more determined by demand; historical data show that most of the demand for crude oil comes from service activities such as transportation, the United States as the world's largest crude oil consumer, the trend direction of oil prices is closely related to the changes in the US service industry. Vaccination accelerates the "immunization" of the whole, normalizes offline activities in overseas economies such as the United States, increases demand for transportation oil, etc., or pulls oil prices upward (for details, see "Oil Prices Rise, Far From Over").
Under the gap between supply and demand, the prices of some globally priced commodities are easy to go up and down, and the PPI may still be at a high level in the next 2 quarters or so; with the easing of domestic supply and demand contradictions, the downward trend of PPI tends to accelerate. The change in ppi is mainly affected by the upstream oil, coal and other energy products, and the prices of major raw materials such as steel, nonferrous metals and cement. Under the influence of the global supply and demand gap, the global pricing commodity prices represented by crude oil are easy to go up and down, forming a certain support for PPI. With the easing of domestic coal supply, demand decline, PPI or peak decline, neutral scenario, 2022 PPI center or about 3%, PPI in the next 2 quarters or so may still be more than 5%, and then the downward acceleration, the end of the year into deflation.
With the acceleration and dominance of cost-side pressure and the rise of the cpi center in 2022, the pressure in the first half of the year is relatively controllable, and the second half of the year is easy to exceed expectations. The price increase of consumer goods directly related to raw materials and strong cost pass-through ability has long been reflected in CPI. Under the weak demand and rising costs, the supply of some industries has contracted and accelerated the clearance; once the terminal demand is repaired, the price increase pressure may be further released. Under the neutral scenario, taking into account cost transmission, pork prices, service price increases, etc., the annual cpi inflation rate is low before and after high, or around 2%, and the high point is close to 3% (for details, see "In 2022, will CPI inflation exceed expectations?"). 》）。
After research, we found that:
(1) Under the traditional cycle, the cyclical fluctuation of prices is the lagging performance of the cyclical changes of the economy; the leading lag relationship between different price indicators reflects the transmission of cyclical characteristics of the economy at the industry level.
(2) Different from the traditional cycle, in recent years, price changes have been greatly affected by the supply side, and the trend of ppi and CPI has diverged many times, and the supply-side reform and The stage of African swine fever are typical. Changes in the supply and demand structure make the changes in the current round of ppi and cpi different from the traditional cycle and supply-side reform
(3) Under the decline of supply elasticity, the prices of some globally priced commodities are easy to go up and down, and the PPI may be at a high level in the next 2 quarters or so; with the easing of domestic supply and demand contradictions, the downward trend of PPI tends to accelerate. With the acceleration and dominance of cost-side pressure and the rise of the cpi center in 2022, the pressure in the first half of the year is relatively controllable, and the second half of the year is easy to exceed expectations.
4. Risk warning
The energy crisis has intensified, and the clearance of pig production capacity has accelerated.