Article/Li Qilin, columnist of Sina Financial Opinion Leader
CPI in March was 4.3% year on year, lower than the previous 5.2%, and also lower than the 4.7% expected by the market. The tail lifting is 3.3%, and the new price increase factor is 1.0%.
With the recovery of transportation and logistics and warmer weather, food prices made up the decline, driving the month on month super seasonal decline of CPI in March. Generally speaking, the month of the Spring Festival is the peak of consumer demand, so the CPI in the month of the Spring Festival will generally rise significantly month on month, and then begin to fall. Since 2012, there have been four Spring Festival holidays in January, and the CPI of the first three February months has dropped significantly month on month compared with January of the same year.
This year, because the COVID-19 epidemic hindered transportation, the month on month ratio in February was still as high as 0.8%, far ahead of the average of 0.1% three times. After the epidemic turned better, the logistics obstruction was gradually unblocked, and the weather turned warmer. In March, the prices of food and other products fell by 1.2% month on month, which was 1 percentage point lower than the average month on month CPI of the previous three similar years.
The month on month ratio of food prices in March was - 3.8%, the previous value was 4.3%. For pork, fresh vegetables and fresh fruits, the three sub items that caused a large fluctuation in CPI, the month on month CPI increased from 9.3%, 9.5% and 4.8% in February to - 6.9%, - 12.2% and - 0.2% respectively.
In March, the CPI of food, tobacco and alcohol items was 13.6% year on year, which affected the year-on-year increase of CPI by 4.1 percentage points. In the food sector, pork declined from 135.2% to 116.4% year on year, but it is still the core support of CPI, driving the CPI 2.79 percentage points year on year, with a contribution rate of 64.9%. Fresh vegetable items fell 12.2% month on month, down from 10.9% to - 0.1% year on year.
Seven major items, excluding food, tobacco and alcohol, increased by 0.1% year on year. Due to the decline of international oil prices, the CPI of transportation and communication fell from - 1.6% to - 3.8% year on year. The CPI of other supplies and services was 5.3% year on year, on the one hand because of the low base, on the other hand, it may be related to the price rise of some services under the epidemic.
The core CPI in March was 1.2% year on year, slightly rising from the low of 1.0% in February. The driving factor was the orderly progress of resumption of production and the gradual improvement of supply and demand structure. However, from the official PMI and high-frequency indicators in March, the current economic momentum is weak, and the year-on-year rebound of core CPI may not be sustainable.
In March, PPI was - 1.0% month on month and - 1.5% year on year, and deflation of industrial products intensified. As always, the fluctuation is mainly contributed by the means of production. In March, its year-on-year and month on month ratio were - 2.4% and - 1.2% respectively.
From the PPI data, we need to focus on three points:
First, the weak economic recovery that began in the fourth quarter of last year was interrupted by the epidemic. The epidemic mainly affected domestic demand in the first quarter, and the impact of the overseas spread of the epidemic on exports and industrial chains in the second quarter will be clearly reflected. The inventory that enterprises actively replenish in response to the recovery has now become a burden. In the future, there is a strong demand for destocking, and the deflation of industrial products will continue. Based on this, we can also infer that only after the total demand rebounds and drives the inventory of industrial products to go down, can the production of industrial enterprises be fully recovered.
Second, under the pressure of inventory, the decline of mining industry, raw material industry and processing industry in the upstream in March was expanding month on month. This means that even if the subsequent recovery of terminal demand, there is no need to worry about the CPI inflation pressure brought by industrial consumer goods. Moreover, under the current circumstances of high leverage, deteriorating external demand environment, and pessimistic growth and income expectations, retaliatory consumption and investment are difficult to sustain.
Third, the sharp drop in oil prices eased the cost pressure on enterprises. On the evening of April 9, Beijing time, news about the production reduction agreement came out frequently, leading to fluctuations in international oil prices. Later, we need to pay attention to whether OPEC+will reach a phased production reduction agreement. However, whether or not a production reduction agreement has been reached, it can be determined that after the global economy has fallen into recession, joint production reduction is becoming more and more fragile, and the oil price hub in 2020 will be significantly lower than that in 2019.
However, according to the current domestic oil product pricing mechanism, if the international oil price is lower than 40 dollars/barrel for a long time, the impact of low international oil prices on domestic CPI and PPI is limited.
We believe that although CPI is still above 3% year on year, the core contradiction of prices in the next stage is to prevent deflation rather than inflation.
First, industrial deflation will further intensify. At present, the core problem of industrial enterprises is overstock and overcapacity. The overseas spread of the epidemic has further exacerbated this pressure. As of April 9, Beijing time, there were 17 countries except China with a cumulative number of confirmed cases of more than 10000, and China's exports to these 17 countries accounted for more than 40% of the total exports for many years. The spread of overseas epidemics has dragged down China's exports, and the growth rate of exports this year will probably be lower than - 16.0% in 2009.
The top priority is to expand domestic demand to boost total demand, but the leverage ratio of local governments, residents and enterprise sectors is high. The counter cyclical adjustment can only rely on fiscal expansion, which is difficult to offset the slowdown of other demand.
Second, the tradable sector shrank, and labor shifted to the service sector, driving down service prices. The number of direct and indirect employment in the export industry chain is 180 million. The contraction of overseas demand and the intensification of trade friction after the global economic recession have affected China's employment in tradable sectors, especially in labor-intensive industries. After the demand for jobs in the tradable sector decreases, the labor force will be transferred to the service industry in a more flexible way, such as part-time, self-employed, etc., which will lower the service price.
Third, grain has little impact on CPI, and there is no need to stock grain. Recently, some countries, such as Vietnam and Egypt, have announced food bans agriculture products Exports have led to discussions about whether grain will promote CPI inflation. We believe that even if globalization retrogressed and the volume of grain trade declined, the impact on domestic CPI inflation would be limited, because China's staple food is basically self-sufficient. In 2019, the consumption of wheat, rice and corn, the three major staple grains, was 111 million tons, 203 million tons and 308 million tons, respectively, and the import volume was 3.7 million tons, 3.26 million tons and 4.7 million tons, respectively. The import dependency was only 3.3%, 1.6% and 1.5%, respectively. If a large-scale grain embargo really breaks out, China will probably introduce policies to encourage and guide the cultivation of staple grains, so there is no need to worry about the soaring food prices.
Fourth, fresh vegetables and fruits may boost CPI year-on-year in the short term, but because their prices are seasonal, they usually do not bring CPI inflation for more than a quarter.
The CPI of fresh vegetables and fruits fluctuates greatly year on year, but their month on month ratio is seasonal. This pattern comes from the impact of weather on planting and transportation, and from short-term changes in demand, such as increased consumption of vegetables and fruits during the Spring Festival. The prices of fresh vegetables and fruits may change beyond the season in the short term, but they usually return to normal within a quarter. For example, the vegetable prices after the Shouguang flood in the summer of 2018 and the fruit prices after the severe cold weather in Hainan, Guangdong and other fruit producing areas in the spring of 2019 all conform to this law. Therefore, when judging the medium and long-term trend of CPI, there is no need to worry about whether agricultural products such as vegetables and fresh fruits will lead to inflation or deflation.
Fifth, the pork price will continue to operate at a high level, but the fluctuation will decline. Due to the high base, the year-on-year price will tend to fall.
For a long time, China's pig breeding has been dominated by free range breeding. This decentralized supply market is close to complete competition. As a result, the pork price fluctuates greatly and has obvious periodicity, which is commonly referred to as the pig cycle. African swine fever has completely changed the pattern of pig breeding in China. The high infectivity and high mortality of its virus make small and medium-sized farms vulnerable, and the epidemic prevention standard has greatly improved the threshold of pig breeding.
As a result, first, the pig stock may be at a low level for a long time. Second, after the increase of industry concentration, large-scale farms can adopt counter cyclical strategies to supplement the stock. For example, when the price is at the top of the pig cycle, they can reduce the supplement, and when the price is at the bottom, they can increase the supplement. This kind of differential strategy and the "catch up" strategy of free range farmers can stabilize the fluctuation of pig supply and pork price.
In general, the deflation pressure of industrial products continues, and the transfer of labor from tradable sectors to non tradable sectors will lower service prices. Among food items, grain has little impact on CPI. Fresh vegetables and fruits usually do not bring CPI inflation for more than a quarter due to seasonal laws. Pork prices run at a high level but fluctuate less. From a year-on-year perspective, the impact of pig prices on CPI will weaken.
The core contradiction of current prices is deflation rather than inflation, and behind deflation is the livelihood of countless people. Policies need to speed up countercyclical adjustment, stabilize aggregate demand through fiscal expansion, subsidize residents' consumption with consumption vouchers, and provide targeted support to specific regions and industries seriously affected by the epidemic, so as to restore the economy as soon as possible.
(About the author of this article: Chief Economist of Yuekai Securities, President of the Research Institute)
