Galaxy Securities: Food prices rebound driving the month-on-month CPI to turn positive in July, inflation to continue mild trend in the second half of the year

Key Points

In July, the month-on-month CPI rose by 0.5% (previously -0.2%), and the year-on-year increase was 0.5% (previously 0.2%). Among them, food prices rose by 1.2% month-on-month (previously -0.6%), while non-food prices rose by 0.4% month-on-month (previously -0.2%), with the rise in food prices driving the CPI to turn positive. The month-on-month PPI fell by 0.2% (previously -0.2%), and the year-on-year decrease was 0.8% (previously -0.8%), with the month-on-month and year-on-year declines the same as the previous month.

Rise in Vegetable, Egg, and Pork Prices Driving Food Prices Up: In July, affected by high temperatures and heavy rainfall in many areas, vegetable and egg prices rose by 9.3% and 4.4% respectively, collectively impacting a 0.20 percentage point increase in the CPI month-on-month, accounting for 40% of the total CPI increase. The 9.3% month-on-month increase in vegetable prices is higher than the average increase of 3.5% over the past decade. Pork prices rose by 2% month-on-month, contributing to a 0.03 percentage point increase in the CPI month-on-month. The seasonal average increase over the past ten years is 5.3%, and the prices in the pig market continue to fluctuate upwards. On the supply side, the overall pace of pig farming is stable, with the impact of previous capacity reductions evident. On the demand side, due to the hot weather, the slaughter volume of pigs remains weak and stable, with dynamic support in the second breeding phase. Overall, there is currently no expectation of a concentrated increase in market supply, although consumer performance support is weak, the market's price support sentiment remains relatively strong.

Strong Summer Travel Demand Driving Non-Food Prices Up Beyond Seasonal Trends: Non-food prices rose by 0.4% month-on-month (previously -0.2%), with a ten-year seasonal average increase of 0.2%, mainly due to the rise in travel-related prices. Travel prices rose by 9.4%, with a five-year seasonal average increase of 5.4%. International oil price fluctuations led to a 1.5% increase in domestic gasoline prices, while prices for transportation equipment use and maintenance rose slightly by 0.1%.

Rise in Upstream Oil, Gas, and Non-Ferrous Mining Prices: Influenced by the rise in international oil prices, prices in the domestic petroleum and natural gas extraction industry rose by 3.0%; the tightening of the mineral end and the continued tight supply situation led to a 1.6% increase in prices in the non-ferrous metal ore mining industry. Affected by the general decline in domestic non-ferrous metal market prices, prices in the non-ferrous metal smelting and rolling processing industry fell by 0.4%, with copper smelting prices falling by 1.6% and aluminum smelting prices falling by 0.2%. Overall, coal demand remains stable, and prices in the coal mining and washing industry remain flat.

Insufficient Industrial Demand Dragging Down Black Metal Prices: Affected by factors such as high temperatures, heavy rainfall affecting construction, and no signs of improvement in funding availability, demand for building materials such as steel and cement remains weak. Amid ongoing industry losses and the transition period between new and old national standards, steel mills have chosen to proactively reduce production and conduct maintenance, resulting in a greater-than-expected decline in output, leading to a 1.7% decrease in prices in the black metal smelting and rolling processing industry. According to the Century Building Network, national cement demand in July decreased by 12% month-on-month, with a slight increase in cement production, exacerbating supply-demand contradictions, leading to a continuous decline in cement prices, and a 0.6% decrease in prices in the non-metallic mineral products industry Mild inflation continues in the second half of the year: CPI shows a mild rebound at a low level, with resilient service spending supporting a slight increase in core CPI. Firstly, in the second half of the year, overall pork prices are expected to rise, but the possibility of a significant increase is small; secondly, the resilience of service consumption expenditure helps drive up core CPI; finally, the high base effect is gradually fading. PPI is unlikely to turn positive within the year, and a recovery requires policy support. Firstly, starting from May, the impact of the PPI base effect has significantly eased, but the new price increase factors have not risen synchronously, dragging down the year-on-year growth rate further improvement; secondly, the global economic and demand outlook is weak, with increasing concerns, which may become the main negative factor restricting the rebound in oil prices; finally, the July Political Bureau meeting emphasized the need for more forceful macro policies, and under the requirement to accelerate the implementation of existing policies, attention should be paid to the accelerated implementation of subsequent "two-pronged" projects to support infrastructure.

Risk Warning: Risks of policy implementation falling short of expectations; risks of consumer confidence recovery falling short of expectations.

Main Text

I. CPI: Food prices drive CPI turnaround on a month-on-month basis

In July, the CPI rose by 0.5% month-on-month (previously -0.2%) and by 0.5% year-on-year (previously 0.2%). The month-on-month CPI in July increased by 0.5% (previously -0.2%), and the year-on-year increase was 0.5% (previously 0.2%), exceeding the consensus expectation of 0.3% from Wind. The average month-on-month increase over the past ten years was 0.3%. Among them, food prices rose by 1.2% month-on-month (previously -0.6%), while non-food prices rose by 0.4% month-on-month (previously -0.2%), with food prices driving the CPI turnaround. The year-on-year growth rate of core CPI was 0.4%, maintaining a mild increase.

The month-on-month turnaround of CPI in July was mainly driven by the rise in food prices. Among food items, the prices of fresh vegetables, eggs, pork, and aquatic products increased by 9.3%, 4.4%, 2%, and 0.4% respectively. In non-food items, airfares, tourism, and hotel accommodation prices rose by 22.1%, 9.4%, and 5.8% respectively. In other items, fuel prices for transportation increased by 1.5%, and household appliance prices rose by 0.4%.

Firstly, the rise in vegetable, egg, and pork prices drove the month-on-month turnaround in food prices. Affected by high temperatures and heavy rainfall in many areas, vegetable production has been adversely affected. Additionally, under high temperature and high humidity conditions, vegetables are more prone to rot and spoilage, making preservation difficult. The increase in preservation costs and the reduction in high-quality sources have jointly pushed prices higher. The prices of fresh vegetables and eggs rose by 9.3% and 4.4% respectively, collectively contributing to a 0.20 percentage point increase in the month-on-month CPI, accounting for 40% of the total CPI increase, with the 9.3% increase in fresh vegetables exceeding the average increase of 3.5% over the past decade In July, the month-on-month price of pork rose by 2%, affecting the month-on-month increase in CPI by about 0.03 percentage points. The ten-year seasonal average is 5.3%, and the price of live pigs continues to fluctuate upwards. On the supply side, the overall pace of pig slaughtering by enterprises is stable, with the impact of previous capacity reduction showing limited market supply circulation in the short term, supporting the strong trend of pig prices. On the demand side, the hot weather has led to a weak and stable continuation of slaughterhouse operations, with dynamic support in the second breeding phase, and short-term demand performance is basically stable. Overall, there is currently no expectation of a concentrated increase in market supply, although consumer performance is weak, the market's strong price support sentiment remains evident.

Second, strong summer travel demand drives non-food prices to rise above seasonal levels. Non-food prices rose by 0.4% month-on-month (previous value -0.2%), with a ten-year seasonal average of 0.2%, mainly due to the rebound in travel-related prices. Tourist prices rose by 9.4%, with a five-year seasonal average of 5.4%. International oil price fluctuations drove domestic gasoline prices up by 1.5%, while prices for transportation use and maintenance rose slightly by 0.1%. According to a WeChat public account of the Ministry of Transport on August 6, urban rail transit passenger volume in July increased by 9.4% month-on-month and 7.6% year-on-year. Data from Air Travel Horizon shows that domestic civil aviation passenger traffic exceeded 58.57 million in July, an increase of about 6% year-on-year.

Third, resident consumption demand remains weak, and prices of optional consumer goods continue to decline. Prices of clothing and footwear decreased by 0.3% and 0.5% respectively, while prices of transportation and communication tools decreased by 0.6% and 0.1% respectively. Among other goods, prices of water, electricity, communication, education services, and medical care remained basically stable, in line with seasonal fluctuations. Rent prices rose by 0.1%, the same increase as the previous month, mainly driven by the demand for student housing during the summer graduation season. Prices of household appliances rose by 0.4% in July, possibly influenced by the June 18th promotional activities.

Fourth, core prices maintain a moderate year-on-year increase, with effective demand continuing to recover. In July, core CPI rose by 0.3% month-on-month and 0.4% year-on-year, maintaining a moderate upward trend.

II. PPI: New price-increasing factors drag down the year-on-year growth rate further improvement

In July, PPI fell by 0.2% month-on-month (previous value -0.2%) and by 0.8% year-on-year (previous value -0.8%), mainly affected by fluctuations in international commodity prices and insufficient domestic industrial demand. In July, the price of production materials decreased by 0.3% month-on-month, with a 0.1 percentage point increase in the decline compared to the previous value, while the price of consumer goods remained flat, with a previous month-on-month change of -0.1% PPI month-on-month decline is the same as last month, with upstream oil and gas and non-ferrous mining prices rising, while insufficient industrial demand drags down prices in the black series. Influenced by the fluctuation and rise in international oil prices, domestic prices in the petroleum and natural gas extraction industry rose by 3.0%; the tight situation at the mining end and the tight supply have not reversed, driving up prices in the non-ferrous metal mining and selection industry by 1.6%. Affected by the general decline in domestic non-ferrous metal market prices, prices in the non-ferrous metal smelting and rolling processing industry fell by 0.4%, with copper smelting prices falling by 1.6% and aluminum smelting prices falling by 0.2%. Overall, coal demand remained stable, with prices in the coal mining and washing industry remaining flat. Due to the impact of high temperatures and heavy rainfall on construction, as well as no signs of improvement in construction progress and funding availability, demand in the steel, cement, and other building materials markets remains weak.

Amid continuous industry losses and the transition period between new and old national standards, steel mills have chosen to proactively reduce production and conduct maintenance, resulting in a greater-than-expected decrease in output, leading to a 1.7% decrease in prices in the black metal smelting and rolling processing industry. According to Bai Nian Jian Zhu Wang, national cement demand in July decreased by 12% month-on-month, with a slight increase in cement production, exacerbating supply-demand contradictions, leading to a continuous decline in cement prices, and a 0.6% decrease in prices in the non-metallic mineral products industry. In the equipment manufacturing industry, prices in the lithium-ion battery manufacturing sector fell by 0.9%, computer manufacturing prices fell by 0.2%, and prices for the manufacturing of whole new energy vehicles fell by 0.1%; prices for the manufacturing of whole gasoline and diesel vehicles rose by 0.4%.

In July, durable consumer goods for residents rose by 0.2% month-on-month, while prices for general daily necessities rose by 0.1%. In the consumer goods manufacturing industry, prices in the chemical fiber manufacturing industry, cultural, educational, sports, and entertainment goods manufacturing industry, and textile, clothing, and apparel industry rose by 0.6%, 0.3%, and 0.1% respectively.

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

Overall, the rebound in pork prices, the low base effect, and continued macroeconomic policy efforts will constitute the three main supports for the continuation of mild price trends in the second half of the year.

CPI shows a mild rebound at a low level, with resilient service spending supporting a slight increase in core CPI. Firstly, overall pork prices are expected to rise in the second half of the year, but the possibility of a significant increase is small. In July, pork prices fluctuated upwards, with a strong monthly trend. In August, group farm plans and individual pig sales may increase month-on-month, and demand for back-to-school banquets in August may see a slight rebound. The overall monthly average may be higher than that of July. In the future, with factors such as capacity recovery, large-scale enterprises releasing inventory, and the impact of second-stage piglet sales, the supply side may weaken, leading to a slowdown in price increases 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 1.1% month-on-month increase in the inventory of sows in June. The pig market is showing a "small cycle" pattern of small fluctuations, and the price of pigs in the second half of the year may have limited upside. Secondly, post-epidemic, residents' consumption patterns and habits continue to change, with consumers increasingly pursuing "instant" emotional satisfaction. "Instant" consumption is expected to continue to show resilience.

From the expenditure direction of the People's Bank of China's survey questionnaire, the downward trend in residents' expenditure is on housing and large commodities, while the upward trend is on tourism, social culture, and entertainment. During the summer, residents maintain a high intensity of travel, and consumption with high social attributes such as dining continues to grow rapidly. The resilience of service consumption expenditure helps drive the core CPI upwards. Finally, the high base effect is gradually fading, and the drag on CPI from the base effect will gradually ease in the fourth quarter.

PPI is unlikely to turn positive within the year, and recovery requires policy support. Firstly, since May, the impact of the base effect on PPI has begun to significantly ease, but due to insufficient domestic demand, new inflationary factors have not risen simultaneously, further improving the year-on-year growth rate. Secondly, the online meeting of the OPEC+ Joint Ministerial Monitoring Committee (JMMC) held on August 1 did not propose any specific recommendations, perhaps indicating that OPEC+ will gradually cancel the voluntary additional production cut plan unchanged from the fourth quarter, which forms a certain bearish sentiment in the international crude oil market.

On the demand side, traditional fuel consumption in the United States is still at its peak in August, and the destocking cycle of commercial crude oil continues, with seasonal support still in place. However, global economic and demand prospects are weak, worries are increasing, and may become the main bearish factor restricting oil price rebound. Finally, the Political Bureau meeting in July proposed to "implement a proactive fiscal policy, accelerate the comprehensive implementation of already determined policy measures, reserve and timely introduce a batch of incremental policy measures." On one hand, there is still a demand for maintaining economic growth, and with a large fiscal revenue gap in the first half of the year, fiscal policy may be further strengthened within the year, focusing on the possibility of issuing new national bonds in the fourth quarter; on the other hand, under the requirement to accelerate the implementation of existing policies, attention should be paid to the support of infrastructure from the accelerated implementation of subsequent "two-tier" projects.

Author: Analyst Zhang Di S0130524060001, Research Assistant Lv Lei, Source: Galaxy Macro, Excerpt from the research report "CPI Better Than Expected, PPI Maintains Weakness - Analysis of July CPI, PPI Data" released by Galaxy Securities on August 9, 2024