August CPI Interpretation: Food prices driving CPI up month-on-month, lack of upward momentum in PPI within the year

Key Points

In August, the month-on-month CPI rose by 0.4% (previously 0.5%), and the year-on-year increase was 0.6% (previously 0.5%). Among them, food prices rose by 3.4% month-on-month (previously 1.2%), while non-food prices fell by 0.3% month-on-month (previously 0.4%), with the rise in food prices driving the CPI increase. The month-on-month PPI fell by 0.7% (previously -0.2%), and the year-on-year decrease was 1.8% (previously -0.8%), with both the month-on-month and year-on-year declines widening.

Rising vegetable and pork prices drive the month-on-month increase in food prices: The high summer temperatures and localized heavy rainfall have adversely affected the growth, harvesting, and transportation of vegetables and fruits in the market, leading to higher vegetable prices. The prices of fresh vegetables, mushrooms, fruits, and eggs rose by 18.1%, 9.8%, 3.8%, and 3.3% respectively, collectively impacting a 0.49 percentage point increase in the CPI month-on-month. Among them, the 18.1% month-on-month increase in vegetable prices is higher than the average increase of 5.8% in the same period over the past decade. In August, pork prices rose by 7.3% month-on-month, affecting a 0.1 percentage point increase in the CPI month-on-month, with the pig market prices continuing to trend upwards. On the supply side, the increasing bullish sentiment in the previous period has led to a tightening of the pace of livestock slaughter by breeding entities, coupled with the entry of secondary breeding, blocking the flow of pigs into slaughterhouses, thus driving up pig prices. On the demand side, with the off-season for consumption, slaughterhouse production continues to be weak and stable, and the pace of secondary breeding high selling and low buying is shifting, with short-term demand performance remaining relatively stable. Looking ahead, there will be varying degrees of increased slaughter in many regions, and the market pressure from secondary breeding inventories remains strong. With the approach of the Mid-Autumn Festival and National Day holidays, the game between supply and demand within the month will drive prices to fluctuate widely.

Decline in outbound travel demand leads to a decrease in non-food prices: Non-food prices fell by 0.3% month-on-month (previously 0.4%), with a five-year seasonal average of 1.3%, mainly due to the decline in prices related to back-to-school travel. Travel prices fell by 0.7% month-on-month, with a five-year seasonal average of 0, and international oil price fluctuations driving a 3% decrease in domestic gasoline prices, while prices for transportation equipment use and maintenance slightly decreased by 0.3%.

Core prices maintain a mild year-on-year increase, with effective demand continuing to recover: Core CPI fell by 0.2% month-on-month and rose by 0.3% year-on-year, maintaining a mild upward trend. Firstly, this month's PPI decline widened, with daily necessities remaining flat month-on-month, clothing prices falling by 0.1%, failing to effectively drive downstream core CPI increases; secondly, the momentum of resident consumption recovery remains weak.

Market downward revisions drag upstream oil and gas, and midstream black, non-ferrous metal prices: Influenced by the improvement in geopolitical conditions and market downward revisions driving oil demand, international oil prices fluctuated downwards, leading to a 4.3% decrease in domestic petroleum and natural gas extraction prices. Weak demand combined with the gradual accumulation of inventory risks, the overall coking coal market fluctuated downwards, with coal mining and washing industry prices falling by 1.2%. Due to the impact of high temperatures and heavy rainfall on construction, the lack of improvement in funding availability, and other factors, demand for building materials such as steel and cement remains weak, with prices in the black metal smelting and rolling processing industry falling by 4.4%. In August, domestic electrolytic copper spot inventories continued to deplete, with current inventory levels still higher than the same period in previous years, reflecting relatively weak end consumption at present, leading to a 2.3% decrease in non-ferrous metal smelting and rolling processing industry prices Prices in some technology-intensive industries have risen, with aircraft manufacturing prices up by 2.1%, industrial robot manufacturing prices up by 0.8%, and computer manufacturing prices up by 0.4%.

CPI is expected to maintain a moderate upward trend, while PPI still lacks upward momentum. It is expected that the CPI will maintain a moderate upward trend throughout the year, mainly due to improvements in tail factors, with the year-on-year central value of CPI expected to rise to around 1% in the fourth quarter. On one hand, pork prices are expected to rise overall in the second half of the year, but the probability of a significant increase is small; on the other hand, insufficient consumption momentum and low PPI will exert certain pressure on the moderate increase in core CPI. The PPI still lacks upward momentum throughout the year, with the year-on-year central value of PPI expected to fall below -2% in the fourth quarter. Firstly, Brent crude oil futures have fallen to the range of $70-75, indicating a weakening global demand, which is unfavorable for the price recovery of internationally priced commodities such as copper and oil; secondly, high-frequency data on real estate and infrastructure reflect relatively weak domestic demand, with a lack of demand-side support for the price increase of domestically priced commodities such as steel.

Main Content

I. CPI: Food prices drive the expansion of year-on-year growth

In August, the CPI rose by 0.4% month-on-month (previous value 0.5%), and by 0.6% year-on-year (previous value 0.5%). In August, the CPI rose by 0.4% month-on-month (previous value 0.5%), and by 0.6% year-on-year (previous value 0.5%), slightly lower than the consensus expectation of 0.7% by Wind. The average month-on-month increase over the past ten years is 0.3%, with food prices rising by 3.4% month-on-month (previous value 1.2%) and non-food prices falling by 0.3% month-on-month (previous value 0.4%), driven by the rise in food prices. Core CPI year-on-year growth rate is 0.3%, continuing to rise moderately.

The month-on-month increase in the CPI in August was mainly driven by the rise in food prices. Among food items, prices of fresh vegetables, fresh mushrooms, pork, fresh fruits, and eggs rose by 18.1%, 9.8%, 7.3%, 3.8%, and 3.3% respectively. In non-food items, seasonal declines were seen in airfares and tourism prices by 5.1% and 0.7% respectively, while fuel prices for transportation vehicles fell by 2.9% and prices of household appliances fell by 0.7%.

Firstly, the rise in vegetable and pork prices drove the month-on-month increase in food prices. The high temperatures and localized heavy rainfall in summer had adverse effects on the growth, harvesting, and transportation of vegetables and fruits in the market, and secondly, influenced by seasonal factors, the vegetable production in northern regions further decreased, leading to higher vegetable prices Prices of fresh vegetables, fresh mushrooms, fresh fruits, and eggs rose by 18.1%, 9.8%, 3.8%, and 3.3% respectively, collectively affecting a month-on-month increase in CPI of about 0.49 percentage points. Among them, the 18.1% increase in fresh vegetables exceeded the average increase of 5.8% in the same period over the past decade. In August, pork prices rose by 7.3% month-on-month, contributing to a 0.1 percentage point increase in CPI, with a ten-year seasonal average of 5.4%. The pig market prices continued to fluctuate upwards.

On the supply side, the increasing bullish sentiment in the previous period led to a tightening of the pace of livestock slaughter by breeding entities, coupled with the entry of secondary breeding, blocking the inflow of pigs into slaughter enterprises, pushing up pig prices. On the demand side, with the off-season for consumption, the slaughter volume of slaughter enterprises continued to operate weakly and steadily, the pace of secondary breeding high selling and low buying shifted, and short-term demand performance remained relatively stable. Looking ahead, there have been varying degrees of increased slaughter volumes in many regions, and the market pressure from secondary breeding inventory remains strong. With the Mid-Autumn Festival and National Day holidays approaching, the game between supply and demand within the month will drive prices to fluctuate widely.

Secondly, a slight decline in outbound travel demand drives non-food prices down. Non-food prices fell by 0.3% month-on-month (previous value 0.4%), with a five-year seasonal average of 1.3%, mainly due to the decline in prices related to back-to-school travel. According to the WeChat official account of the Ministry of Transport on September 5th, the urban rail transit passenger volume in August decreased by 2.3% month-on-month. Tourism prices fell by 0.7%, with a five-year seasonal average of 0, international oil price fluctuations driving domestic gasoline prices down by 3%, and fuel prices for transportation vehicles falling by 2.9%, with a slight decrease of 0.3% in prices for transportation vehicle use and maintenance.

Thirdly, the weak recovery momentum of consumer spending leads to a continued downward trend in prices of optional consumer goods. Prices of clothing and shoes fell by 0.2% and 0.3% respectively month-on-month, while prices of transportation and communication tools fell by 0.3% and 0.8% respectively. Among other goods, prices of water and electricity, rent, communication, education services, and pharmaceuticals and healthcare remained relatively stable, in line with seasonal fluctuations. Prices of household appliances in August fell by 0.7% month-on-month, as the seasonal demand gradually decreased with the approaching change of seasons, driving down prices of home appliances through seasonal promotions and inventory clearance by businesses.

Fourthly, core prices maintain a mild year-on-year increase, with effective demand continuing to recover. In August, core CPI decreased by 0.2% month-on-month and rose by 0.3% year-on-year, maintaining a mild upward trend. Firstly, the decline in PPI this month widened, with daily necessities remaining flat month-on-month, clothing prices falling by 0.1%, failing to effectively drive downstream core CPI upwards; secondly, the weak recovery momentum of consumer spending remains.

2. PPI: New Inflation Factors Drag Down Year-on-Year Growth Rate Further Improvement

In August, the month-on-month PPI fell by 0.7% (previous value -0.2%), and the year-on-year decrease was 1.8% (previous value -0.8%), mainly affected by factors such as the downward trend of international commodity prices and insufficient domestic industrial demand. In August, the price of production materials fell by 1% month-on-month, expanding by 0.7 percentage points compared to the previous value, affecting the PPI to decrease by about 0.74 percentage points. The price of consumer goods remained flat for two consecutive months, with food, general daily necessities, and durable consumer goods prices all remaining flat, while clothing prices fell by 0.1%.

The wider month-on-month decline in PPI dragged down the prices of upstream oil and gas, and midstream black and non-ferrous metals. Influenced by the improvement in geopolitical environment and the downward pressure from market adjustments on crude oil demand, international oil prices fluctuated downward, leading to a 4.3% decline in the prices of domestic petroleum and natural gas extraction. Weak demand combined with the gradual accumulation of inventory risks, the overall coking coal market fluctuated downward, with a 1.2% decline in coal mining and washing industry prices. Due to the impact of high temperatures and heavy rainfall on construction, as well as no signs of improvement in funding availability, demand for steel, cement, and other building materials remains weak, with a 4.4% decrease in prices for black metal smelting and rolling processing industries. Overall, cement demand remained weak in August, with cement prices continuing to decline. According to Bai Nian Construction Network, the average weekly cement outflow in August decreased by 6.1% month-on-month, and prices of non-metallic mineral products fell by 0.7%. With the continuous destocking of domestic electrolytic copper in August, current inventory levels remain higher than the same period in previous years, reflecting relatively weak end-consumer demand, leading to a 2.3% decline in prices for non-ferrous metal smelting and rolling processing industries. Prices rose in some technology-intensive industries, with aircraft manufacturing prices rising by 2.1%, industrial robot manufacturing prices rising by 0.8%, and computer manufacturing prices rising by 0.4%.

In August, prices of general daily necessities and durable consumer goods for residents remained flat month-on-month, while clothing prices fell by 0.1%. In the consumer goods manufacturing industry, prices in the cultural, educational, sports, and entertainment goods manufacturing industry, as well as the agricultural and sideline food processing industry, fell by 0.2% and 0.1% respectively, while prices in the textile, clothing, and apparel industry remained flat.

3. CPI Expected to Maintain Mild Upside, PPI Still Lacks Rebound Momentum

It is expected that the CPI will maintain a mild upward trend throughout the year, mainly due to the improvement in base effects, with the year-on-year central value of CPI expected to rise to around 1% in the fourth quarter. On one hand, in the second half of the year, overall pig prices are expected to rise, but the possibility of a significant increase is small. In August, pig prices rose and then fell, with a monthly upward trend, as the weather cooled in September, terminal consumption may show a slight increase month-on-month. In addition, in order to meet the strong demand for fat pigs in the fourth quarter, breeding and farming enterprises have the urgent need to increase weight in September and the fourth quarter If Ruoyu enters the market late, the spot price may show a fluctuating trend, with the price center oscillating upwards. On the other hand, at present, the scale of domestic pig farming groups continues to increase. The "replenishment - reduction" in the pig market is more driven by breeding profits. The profit of self-bred pigs has been continuously increasing since late May, leading to a consecutive two-month increase in the inventory of sows from June to July. The pig market is showing a "small cycle" pattern of small ups and downs, and the price increase in the second half of the year may be limited; on the other hand, insufficient release of consumption power and the low PPI exert a certain restraint on the moderate increase in core CPI.

Within the year, PPI still lacks upward momentum, and it is expected that the year-on-year central PPI will fall below -2% in the fourth quarter. First of all, international oil prices have been continuously fluctuating downward since July. Brent crude oil futures have fallen to the range of $70-75, indicating a weakening global demand, which is unfavorable for the price recovery of internationally priced commodities such as copper and oil; secondly, high-frequency data on real estate and infrastructure reflect that domestic demand is still relatively weak, and the rise in domestically priced commodities such as steel lacks demand-side support. The performance of the real estate sales market in August remains weak, with the transaction area of commercial housing in 30 large and medium-sized cities decreasing by 16.3% year-on-year and 3.2% month-on-month. In terms of high-frequency data, in the last week of August, the production of rebar was 1.62 million tons, the cement shipping rate was 34.9%, and the coking enterprises' operating rate was 73.9%, all of which were in the historically low seasonal range, dragging down the prices of intermediate industrial products.

Article Author: Zhang Di S0130524060001, Lv Lei S0130524080002, Article Source: China Galaxy Macro, Original Title: "CPI Slightly Rises, PPI Widens its Decline - Interpretation of August Price Data"