Inflation bottomed out! Dual drivers of pork and oil, YoY CPI turned positive in August, MoM PPI turned positive, while demand remains weak.

August CPI and PPI hit bottom and rebound, indicating the bottom of prices!

On Saturday, the National Bureau of Statistics released the price data for August, with CPI rising to 0.1% MoM and PPI rising to -3.0% MoM.

The price increase of "pork" is driven by both factors, and the demand for travel continues to support CPI. At the same time, influenced by factors such as the improvement in industrial product demand, China's CPI and PPI have both rebounded YoY.

However, analysis points out that the risk of negative growth in CPI may have been fully released, but due to weak demand, short-term CPI and PPI are likely to remain low. In other words, the low-price environment is expected to continue in the short term.

Dual driving forces of pork and travel demand support

The main reason for this CPI rebound is the upward trend in pork prices, the rebound in oil prices, and the continued support of service prices.

Cinda Securities pointed out that the positive turnaround of CPI in August is mainly due to the improvement in the drag factors of pork and oil.

The main reasons behind the upward trend in pork prices are: first, there is still a phenomenon of farmers holding back sales due to the pressure of raising pigs; second, some areas have been affected by natural disasters such as floods, which have hindered the transportation of pigs and led to a temporary reduction in the supply of pigs.

Another factor that has boosted the upward turn of CPI is the rebound in oil prices. The upward trend in international oil prices in August is mainly driven by the shortage of crude oil supply.

Meanwhile, service prices remain an important support. Haitong Securities pointed out that the increase in service CPI has seasonally declined, but overall it is not weak.

Among them, the MoM increase in service CPI has shown a seasonal decline, dropping to 0.1%. Although it is slightly lower than the pre-epidemic central value (0.14%), it is higher than the MoM increase during the three years of the epidemic.

Moreover, considering that the MoM increase in service prices in July reached a new high for the same period since 2009, the overall performance of service prices during the summer vacation this year is actually not weak, especially in the travel sector. In August, hotel accommodation and tourism prices continued to rise, with increases of 1.8% and 1.4% respectively.

In addition, Ping An Securities pointed out that food prices remained stable overall, while commodity prices remained low.

Influential factors such as fresh vegetables, fresh fruits, and eggs showed weaker performance than seasonal trends, while pork prices rebounded significantly. The MoM decline in prices of durable consumer goods such as household appliances, transportation vehicles, and communication tools was the highest in the same period in recent years.

It should be noted that in August, excluding food and energy, core inflation remains weak, with the same YoY growth rate as July, indicating that the downward pressure on the economy may still be unresolved.

Industrial Demand Recovery Drives PPI Rebound

After four consecutive months of MoM decline, PPI rebounded MoM in August. The narrowing of the decline was mainly due to the lower base and increased demand for some industrial products.

Sinolink Securities pointed out that the recovery of industrial demand drove the price increase.

The YoY decline in PPI continued to narrow by 1.4 percentage points in August, with the lower base contributing to about 80% of the decline, in addition to the impact of increased demand for some industrial products. First, the PMI prices and inventories in August continued to support the logic of replenishing raw materials. Secondly, the replenishment of raw materials drove up the prices of production materials, especially in the raw materials industry.

Ping An Securities pointed out that the support for the MoM rebound in PPI by industry is as follows:

1. Recovery of domestic construction demand and increased policy expectations led to a narrowing of price declines in the black and building materials sectors. The intensified growth stabilization policies improved demand expectations, and the gradual implementation of control policies on crude steel production in many regions constrained the supply side, providing support for construction activities. The four sub-industries in the black and building materials sectors contributed 0.2 percentage points more to the MoM growth rate of PPI in August compared to the previous month.

2. Rebound in international crude oil prices provided support for the prices in the petrochemical industry chain. The five sub-industries in the petrochemical sector contributed 0.2 percentage points more to the MoM growth rate of PPI in August compared to the previous month.

3. However, prices in the downstream manufacturing sector were not strong. The prices of six sub-industries, including computer, communication, and electronic equipment manufacturing, pharmaceutical manufacturing, textile, clothing, and apparel manufacturing, tobacco products, and wood processing, declined MoM; prices in industries such as metal products, general equipment, transportation equipment manufacturing (railway and shipbuilding), and paper and paper products continued to decline MoM.

What's Next for Inflation?

Guosheng Securities stated that looking ahead, the bottom of this round of CPI and PPI may have already appeared, and the subsequent decline may gradually narrow or turn into an increase; in absolute terms, given the abundant domestic supply but weak demand, short-term CPI and PPI are likely to remain low; in other words, the low-price environment is expected to continue in the short term.

According to calculations, the central values of CPI and PPI for the whole year of 2023 may remain at 0.6% and -2.9%, which is not significantly different from previous expectations. In terms of pace, the bottom of CPI and PPI may have already appeared (CPI was -0.3% in July, PPI was -5.4% in June), and CPI is likely to gradually rise subsequently, possibly reaching around 0.9% by the end of the year; the decline in PPI is expected to continue to narrow, possibly narrowing to around -1.9% by the end of the year, and a positive growth may need to wait until around Q2 2024.

China Securities believes that the upward channel of inflation is slow, and it is expected that corporate profits may also improve.

The risk of negative growth in CPI may have been fully released, and it is expected that CPI will slowly rise in the future. First, under the background of the continuation of production reduction agreements, it may be difficult for oil prices to decline significantly again. Second, the downward trend of industrial consumer prices has been alleviated to some extent.

We believe that the upward channel of inflation is slow mainly because there is no basis for a further substantial rebound in pig prices in the short term. Even if the subsequent inflation rises slowly, the direction of inflation entering a rising trend is more important. It is expected that corporate profits may also improve after both CPI and PPI enter the rising stage.

Has the bottom of prices appeared? What about the bottom of the economy and policies?

Guosheng Macro points out that overall, August PMI, imports, real estate, infrastructure, and construction data have all shown marginal improvement, and prices are also gradually bottoming out. This all indicates that China's economy may stabilize on a month-on-month basis, but it is not a fundamental improvement and has not yet emerged from the "economic bottom". It is highly likely that policies will still need to be introduced in September.

In the short term, focus on four major directions: loosening real estate restrictions in first-tier cities, urban village transformation, comprehensive debt restructuring, and further reserve requirement ratio cuts (high probability in September).

Haitong Securities also reminds that attention should be paid to changes in the fundamentals of the real estate market in terms of PPI.

Looking ahead, due to the decline in the base effect, the central point of PPI on a year-on-year basis may further increase. However, the elasticity of industrial product prices still depends on the implementation of stable growth policies and the recovery of endogenous economic momentum. Recently, a series of real estate policies have been implemented, including "recognizing houses but not loans," reducing down payment ratios for first and second homes, and lowering interest rates for existing housing loans. The next focus will be on changes in the fundamentals of the real estate market.