Core CPI rose moderately in June, while PPI improvement requires policy support

Key Points

In June, the month-on-month CPI fell by 0.2% (previously -0.1%), while the year-on-year increase was 0.2% (previously 0.3%). The ten-year average month-on-month change is -0.1%. Among them, food prices fell by 0.6% month-on-month (previously 0%), while non-food prices decreased by 0.2% (previously -0.2%). The PPI fell by 0.2% month-on-month (previously +0.2%), and decreased by 0.8% year-on-year (previously -1.4%), with the rate of decline continuing to narrow.

Food prices, except for pork, fell, driving down the food price index: In June, pork prices rose by 11.4% month-on-month, while the five-year average seasonally adjusted change is -0.6%. The strong performance of the pork market continued due to the gradual realization of previous production capacity reductions, bullish sentiment, and secondary fattening leading to short-term supply tightening. Prices of other livestock products such as beef, mutton, and poultry showed a downward trend, with beef and mutton prices falling by 2.5% and 0.9% respectively. Seasonal vegetables and aquatic products were in abundance, leading to seasonal declines in prices of fresh vegetables, potatoes, fresh fruits, and shrimp and crab by 7.3%, 4.8%, 3.8%, and 2.4% respectively. In total, these factors contributed to a 0.25 percentage point decrease in the CPI month-on-month, with the 7.3% decrease in fresh vegetables exceeding the 3.5% average decline over the past decade.

Declines in durable goods prices and reduced travel expenses led to a slight decrease in non-food prices: Non-food prices fell by 0.2% (previously -0.2%), with a ten-year seasonally adjusted average of 0.1%, mainly due to the decline in durable goods prices. Influenced by activities such as trade-ins, price wars among car manufacturers, and the "618" promotion, prices of household appliances and automotive durable goods fell by 1.2% and 1% respectively. Additionally, travel prices fell by 0.8%, with a five-year seasonally adjusted average of -0.5%.

Tight supply of upstream non-ferrous metals and coal led to price increases: With the arrival of the "peak summer" season, seasonal demand for coal increased. Coupled with stringent safety supervision at production sites and state-owned coal mines leading production cuts, strong demand and tight supply drove coal mining and washing prices up by 1.1%. Tightening at the ore end and depletion of recycled copper inventories led to price increases in the non-ferrous metal ore mining and selection industry by 3.8%, and in non-ferrous metal smelting and processing by 1.6%, with lead smelting, aluminum smelting, and copper smelting prices rising by 4.8%, 2.6%, and 0.8% respectively.

Insufficient demand for some industrial products dragged down prices of black metals: Influenced by factors such as heavy rainfall in the south delaying the resumption of real estate and infrastructure projects, steel consumption weakened, with no improvement in end demand. Steel inventories slightly increased, and raw material demand was suppressed, leading to a 0.6% decrease in prices of black metal smelting and processing. Starting from June 1st, cement began to implement new national standards. Currently, cement companies are in the process of destocking, with cement being sold as soon as it is produced and not stored. Furthermore, companies with low inventory levels have recently reduced their cement supply, causing the price of cement manufacturing to change from a 0.8% decrease to a 3.3% increase.

Mild inflation expected to continue in the second half of the year: CPI is expected to mildly rise, with resilient service expenditures supporting a slight increase in core CPI. Firstly, pork prices are expected to rise in the second half of the year, but the possibility of a significant increase is low Secondly, the resilience of service consumption expenditure helps drive the core CPI upwards; finally, the gradual fading of the high base effect. The improvement in PPI may be limited, and a rebound requires policy support. Firstly, the impact of the May PPI's base effect is beginning to significantly ease; secondly, domestic gasoline prices in the second half of the year may show an overall trend of rising first and then falling, with limited price increases; finally, policy support in infrastructure and the manufacturing sector will drive stable recovery of domestic demand.

I. CPI: Decline in Food Prices Drives CPI Month-on-Month Decrease

In June, the CPI decreased by 0.2% month-on-month (previously -0.1%), and increased by 0.2% year-on-year (previously 0.3%). In June, the CPI decreased by 0.2% month-on-month (previously -0.1%), and increased by 0.2% year-on-year (previously 0.3%), with a ten-year average month-on-month of -0.1%. Among them, food prices fell by 0.6% month-on-month (previously 0%), while non-food prices fell by 0.2% month-on-month (previously -0.2%), with the decline in food prices leading to a slight expansion of the CPI month-on-month decrease. Core CPI year-on-year growth rate was 0.6%, continuing to rise moderately.

The slight expansion of the CPI decrease in June was mainly driven by the decline in food prices. Among food items, prices of fresh vegetables, potatoes, fresh fruits, and shrimp and crab decreased by 7.3%, 4.8%, 3.8%, and 2.4% respectively. Beef in the livestock category decreased by 2.5%, while pork increased by 11.4%. The rise in pork prices was unable to offset the seasonal general decline in other food items. In the non-food category, gasoline prices decreased by 2%, household appliances by 1.2%, transportation items by 1%, and tourism prices by 0.8%. In other categories, clothing prices decreased by 0.2%, while medical and housing prices both slightly increased by 0.1%.

Firstly, apart from pork, the general decline in food prices led to a decrease in the food category month-on-month. Pork prices increased by 11.4% in June, with a five-year average month-on-month of -0.6%. The pig market prices continued to be strong, with the gradual manifestation of previous capacity digestion and bullish sentiment, as well as the short-term supply tightening caused by secondary fattening. Prices of other livestock products such as poultry, beef, and mutton showed a downward trend, with beef and mutton prices decreasing by 2.5% and 0.9% respectively. In late June, the General Office of the Ministry of Agriculture and Rural Affairs issued a notice on stabilizing the development of beef production to stabilize beef production capacity and further reduce the extent of industry capacity loss caused by price declines. Some seasonal vegetables and aquatic products were concentrated on the market, with seasonal declines of 7.3%, 4.8%, 3.8%, and 2.4% for fresh vegetables, potatoes, fresh fruits, and shrimp and crab respectively, collectively affecting a decrease of approximately 0.25 percentage points in the CPI month-on-month, with the 7.3% month-on-month decline in fresh vegetables exceeding the average decline of 3.5% in the same period over the past decade Section II: Decline in Durable Goods Prices and Decrease in Travel Drive Slight Decline in Non-Food Prices. Non-food prices fell by 0.2% (previous value -0.2%), with a ten-year seasonal month-on-month average of 0.1%, mainly due to the decline in durable goods prices. Influenced by trade-in activities, price wars among car manufacturers, and "618" promotions, prices of household appliances and automotive durable goods fell by 1.2% and 1% respectively. In addition, travel prices fell by 0.8% month-on-month, with a five-year seasonal average of -0.5%. Fluctuations in international oil prices led to a 2.0% decrease in domestic gasoline prices, while prices for transportation use and maintenance remained stable. Data from the Ministry of Culture and Tourism showed that during the Dragon Boat Festival holiday, domestic travel in China increased by 6.3% year-on-year, with total spending by domestic tourists increasing by 8.1% year-on-year, both showing a slight decrease compared to the May Day holiday (travelers increased by 7.6%, spending increased by 12.7%).

Section III: Weak Consumer Demand Persists, Optional Consumer Goods Prices Continue to Decline. Among other goods, prices of clothing and footwear fell by 0.2% and 0.4% respectively, while prices of other goods and services fell by 0.2%. Prices of water, electricity, communication and postal services, education services, and pharmaceuticals remained relatively stable, in line with seasonal fluctuations. Rent prices rose by 0.1%, with the increase expanding compared to the previous month, mainly driven by increased demand for rental housing from college graduates during graduation season. Additionally, prices for household services increased by 0.1%.

Section IV: Core Prices Maintain Mild Year-on-Year Increase, Effective Demand Continues to Recover. In June, core CPI decreased by 0.1% month-on-month and increased by 0.6% year-on-year, maintaining a mild upward trend.

Section II: PPI: Improvement in Tail Factors Drives Further Narrowing of Year-on-Year Decline

In June, PPI decreased by 0.2% month-on-month (previous value +0.2%) and decreased by 0.8% year-on-year (previous value -1.4%), mainly affected by fluctuations in international commodity prices and insufficient domestic industrial demand. In June, producer prices fell by 0.2% month-on-month, a decrease of 0.6 percentage points from the previous value, while consumer goods prices fell by 0.1%, with the same decrease as the previous month. Consumer goods prices continued to trend slightly lower, with durable consumer goods falling by 0.7%, indicating a slow recovery in consumer demand.

The month-on-month decline in PPI shifted from an increase to a decrease, with tight supply of non-ferrous metals and coal leading to price increases, while insufficient demand for some industrial products dragged down prices in the black series. With the arrival of the peak summer season, seasonal increase in coal demand, coupled with stringent safety supervision at production sites, state-owned coal mines leading the production reduction, strong demand and tight supply driving a 1.1% increase in coal mining and washing industry prices The tightening of ore end, the clearance of recycled copper inventory drove up the prices of non-ferrous metal mining and selection industry by 3.8%, and the prices of non-ferrous metal smelting and rolling processing industry by 1.6%. Among them, the prices of lead smelting, aluminum smelting, and copper smelting increased by 4.8%, 2.6%, and 0.8% respectively; in addition, international oil price fluctuations led to a 2.9% decrease in the prices of domestic petroleum and natural gas extraction industry.

In terms of industrial products, influenced by factors such as slow resumption of real estate infrastructure projects due to heavy rainfall in the south, steel consumption weakened, terminal demand did not improve, steel inventory slightly increased, raw material demand was suppressed, and the prices of black metal smelting and rolling processing industry decreased by 0.6%; starting from June 1st, cement began to implement new national standards, currently cement enterprises are in the process of clearing inventory, cement is sold immediately after production without being stored, and companies with low inventory have recently reduced their cement supply, leading to a change from a 0.8% decrease to a 3.3% increase in cement manufacturing prices.

In June, the month-on-month durable consumer goods decreased by 0.7%, while the prices of general daily necessities remained stable. Affected by industry overcapacity and price wars, the prices of automobile manufacturing industry decreased by 0.7%, the prices of new energy vehicle manufacturing decreased by 0.1%, and the computer communication manufacturing industry decreased by 0.3%. The textile and apparel industry decreased by 0.2% and 0.1% respectively.

III. Mild Inflation Continues to Rise in the Second Half of the Year

Overall, the three main themes that will drive mild inflation in the second half of the year are the rise in pork prices, the low base effect, and the accelerated pace of policy efforts.

CPI is expected to rise mildly from a low level, with resilient service spending supporting a slight increase in core CPI. Firstly, in the second half of the year, pork prices overall will trend upwards, but the likelihood of a significant increase is small. The clearance of live pigs has accelerated since the fourth quarter of last year, corresponding to a gradual reduction in supply of live pigs in the third quarter. After the decline in pork prices in late June, the sentiment of supporting prices by reducing inventory and raising piglets has resurfaced in the breeding end, with breeders starting the "third wave of piglet raising". With the continuous reduction in theoretical slaughter and the boost from piglet raising, it is expected that pork prices will enter an accelerated upward trend. On the other hand, at present, the scale of domestic pig breeding groups continues to increase, and the "replenishment - reduction" of the pig market is more driven by breeding profits. The profit of self-bred and self-raised pig breeding has been fluctuating positively since late May, indicating that pig production capacity may switch to the replenishment stage, and the pig market is showing a "small cycle" pattern of small ups and downs. The increase in pork prices in the second half of the year may be limited; secondly, post-epidemic changes in consumer consumption patterns and habits continue, with consumers increasingly pursuing "instant" emotional satisfaction. According to the expenditure direction in the central bank's survey questionnaire, the declining expenditure directions for residents are housing and large commodities, while the rising directions are tourism, social culture, and entertainment. Residents are maintaining a high intensity of travel during the summer vacation period Consumption with high social attributes such as catering continues to maintain rapid growth, and the resilience of service consumption expenditure helps drive the core CPI upwards; finally, as the high base effect gradually fades, the drag on CPI from the base effect in the third quarter is gradually easing.

It is expected that the base effect of CPI in July will be 0%, with new price increase factors at 0.7%, and a year-on-year growth rate of 0.7%. Overall, we expect the full-year CPI growth rate to be 0.5%, with growth rates in the third and fourth quarters at 0.6% and 1% respectively.

The improvement in PPI may be limited, and a policy push is needed for recovery. Firstly, since May, the base effect of PPI has begun to significantly ease, which is favorable for a rapid improvement in PPI year-on-year; secondly, in the second half of the year, domestic gasoline prices may show an overall trend of rising first and then falling, with limited price increases. From the demand side, in July-September, due to increased public self-driving travel during the summer vacation, increased gasoline consumption in hot weather, and terminal gas stations stocking up ahead of the National Day holiday, overall demand expectations are strengthening. On the supply side, future OPEC+ production increases and non-OPEC+ supply recovery will lead to a relatively loose supply, and it is believed that oil prices may show a trend of peaking first and then declining in the second half of the year. Finally, the optimistic expectations for infrastructure in the first half of the year have not materialized, and the target amount of special bonds of 2.6 trillion yuan is still waiting to be issued in the second half of the year. Driven by new quality production capacity, equipment renewal, and exports, the manufacturing industry is expected to maintain high growth throughout the year, and infrastructure and manufacturing will drive stable domestic demand recovery.

It is expected that the base effect of PPI in July will be -0.1%, with new price increase factors at -0.3%, and a year-on-year growth rate of -0.4%. Overall, we expect the improvement in PPI throughout the year to be limited, with PPI year-on-year growth possibly unable to turn positive. We forecast a full-year PPI year-on-year rate of -1.3%, with growth rates in the third and fourth quarters at -0.6% and -0.4% respectively.

Author: Zhang Di, Source: Galaxy Macro, Original Title: "Slight Year-on-Year Increase in CPI, Continued Narrowing of PPI Decline - June CPI, PPI Data Analysis 》

Zhang Di S0130524060001