Extensive inflationary pressures exist at both ends of China’s production and consumption
According to data released by the Statistics Bureau of the Communist Party of China on October 11, in October, China’s Producer Price Index (PPI) rose by 13.5% year-on-year, an increase of 2.8 percentage points from September, exceeding the 12.3% previously predicted by economists. ; The Consumer Price Index (CPI) rose by 1.5%, an increase of 0.8 percentage points from the increase in September. It was the fastest rate of increase since September 2020 and was higher than the 1.4% expected.
According to calculations by the CCP Statistics Bureau, in October’s PPI year-on-year increase, the carry-over impact of last year’s price changes was approximately 1.8 percentage points, the same as last month; the impact of the new price increase was approximately 11.7%, an increase of 2.8 percentage points from the previous month.
According to statistics from the Bureau of Statistics, of the year-on-year increase in PPI in October, the price of means of production rose by 17.9%, an increase of 3.7 percentage points; the price of means of living rose by 0.6%, an increase of 0.2 percentage point. Among the 40 industrial sectors surveyed, 36 saw price increases, the same as last month. Among the major industries, the price of coal mining and washing industry increased by 103.7%, an increase of 28.8 percentage points.
Bruce Pang, head of macro and strategic research at Huaxing Securities (Hong Kong), said that the latest PPI and CPI data “implied that there are widespread inflationary pressures on both production and consumption. Inflationary pressures and stronger monetary policy stances in other major economies may be It will limit China’s room for maneuver to loosen its monetary policy.”
Zhang Zhiwei, chief economist of Baoyin Capital Management, said that the PPI and CPI scissors gap continues to widen, indicating that the risk of stagflation continues to rise, and the transmission from PPI to CPI is worrying. Previously, this conduction effect was limited, because companies used inventory to avoid passing cost increases to consumers, but inventory continues to decrease. In recent months, more companies have raised their prices. This transmission effect will become more pronounced in the coming months and further push up the CPI. This will limit the policy easing space of the Central Bank of the Communist Party of China next year.
According to the news from Jiemian News on November 10, a recent price adjustment notification letter from Oriental Yuhong showed that due to the recent continuous increase in the prices of emulsions, curing agents, resins, asphalt, modifiers and other raw materials, and the dual control of energy consumption, the market supply is affected. Oriental Yuhong will increase the price of all products from November 15th, and the price increase will be between 10%-20%.
In October, pork prices continued to fall, but the decline was smaller than that of the previous month, and there were signs of stopping the decline and recovering. Vegetable prices have risen sharply since mid-October. According to data from the CCP Statistics Bureau, vegetable prices have increased by 15.9% year-on-year and 16.6% month-on-month.
Zhou Hao, senior Asian economist at Commerzbank, believes that according to the current CPI trend, it is possible to “break 3” next year. “This is intolerable. How long the pressure of rising food prices can last requires further observation.”
Ji Chunhua, senior vice president of the International Research Department of Zhongtai Finance, analyzed that as the upstream price rise began to be transmitted to the downstream, combined with the rising winter food prices, the future CPI may remain at a relatively high level.
Wang Jun, chief economist of Centaline Bank, said that the CPI rose 1.5% year-on-year in October, mainly due to the greater impact of non-food prices. Six of the seven categories of non-food prices rose, which were related to upstream energy products and raw materials. The more relevant transportation and communication categories and residential categories rose 7.0% and 1.7% year-on-year, respectively, indicating that the upstream industrial product inflation is being transmitted to the downstream. In addition, from a month-on-month point of view, the value of 0.7% is the second largest increase in the year, highlighting that the pressure of rising terminal prices is accumulating.
CITIC Securities Macro Analyst: CPI may be higher than expected
Cheng Qiang, chief macro analyst at CITIC Securities, wrote an article on November 10 that the CPI entered an upward range in the fourth quarter as scheduled. First of all, the price of fresh vegetables in October increased by 16.6% month-on-month, which affected the CPI increase by about 0.34%, accounting for about 50% of the total increase from the previous month. It is expected that vegetable prices may remain in a relatively high range this winter.
Secondly, driven by the prices of agricultural chemicals and chemical fertilizers, the prices of freshwater fish, eggs and edible vegetable oil in food prices rose by 18.6%, 14.3% and 9.3% respectively.
Third, due to the continued high prices of crude oil, the prices of gasoline and diesel have risen by 32.2% and 35.7%, respectively, which is finally reflected in the CPI’s important statistical sub-item transportation and communication prices, which have risen by 7.0% year-on-year.
Cheng Qiang predicts that the follow-up CPI may rise beyond expectations:
First of all, the price of pork, which is the worst drag on the upward trend of CPI, has begun to bottom out. Pork prices have rebounded slightly since October. Although pork prices fell 44.0% year-on-year in October, the rate of decline has narrowed by 2.9 percentage points compared with the previous value. Judging from the three quarterly reports of listed pig raising companies, most of them are already at a loss. Under the background of high feed prices, this kind of supply-side game is obviously unsustainable. Therefore, it is expected that from the fourth quarter to next year, the price of pork will not be sustainable. Continue to be a drag on CPI.
Second, the transmission of crude oil prices to the prices of consumer goods has already occurred through two channels that affect the prices of agricultural industrial products and the prices of transportation and communication. At present, crude oil inventories in the world, OECD, and North America are at low levels since 2016. Looking forward to the fourth quarter to next year, it is expected that the demand side will gradually return to the level before the CCP virus epidemic around the middle of 2022, but there are still games on the supply side. Increasing production has strong uncertainty, which provides support for crude oil prices to operate in a higher range. On October 25, the price of Brent crude oil once hit US$86/barrel. In fact, as long as the price of crude oil from the fourth quarter to next year is higher than US$65/barrel, it will be significantly higher than the central level of crude oil prices before the epidemic. And the price of the service plays a leading role.
In October, the prices of industrial products generally rose. The price of Brent crude oil rose from US$74.8/barrel in September to US$83.8/barrel, a month-on-month increase of approximately 12.1%. Affected by the tight domestic supply, coal prices also increased. Judging from the monthly average spot price of major ports, the price of thermal coal rose from RMB 1278.0/ton in September to RMB 1946.1/ton in October, an increase of 52.3%.
On October 11, China’s independent economist Gong Shengli told Radio Free Asia that raw materials such as coal and petroleum are necessities that dominate people’s livelihoods, and that rising prices will be a problem that cannot be resolved in the short term.
The important thing is that rising coal prices will be reflected in electricity prices. Chinese Premier Li Keqiang previously stated that rising electricity prices will not contribute to inflation, but Gong Shengli believes that rising electricity prices will drive up all other costs, including food, drinking, and daily necessities. The lack of electricity will affect people’s livelihood and cause a chain reaction.
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