Shenwan Hongyuan: The impact of tariffs on PPI is significant, but the improvement in consumer demand provides substantial support for core CPI

According to the Zhitong Finance APP, Shenwan Hongyuan released a research report stating that on May 10, the National Bureau of Statistics announced the inflation data for April, with the CPI year-on-year at -0.1%, the previous value at -0.1%, the expected value at -0.2%, and the month-on-month at 0.1%; the PPI year-on-year at -2.7%, the previous value at -2.5%, the expected value at -2.8%, and the month-on-month at -0.4%. Although the decline in international commodity prices has dragged down the PPI performance, the domestic "old-for-new" policy has driven a recovery in core commodity demand, coupled with tightened food supply and a recovery in service consumption, leading to a slight increase in the CPI month-on-month. Attention should be paid to the pressure from tariffs on the low capacity utilization rate of midstream and downstream industries, which suppresses the PPI, as well as the support of domestic demand recovery policies for inflation.

The main points of Shenwan Hongyuan are as follows:

The decline in international oil prices, coupled with weak demand for steel and coal, has significantly dragged down PPI due to the drop in commodity prices in April.

The PPI month-on-month in April was -0.4%. The decline in international oil prices has led to a continuous drop in domestic oil prices, with negative month-on-month PPI for oil extraction (-3.1%) and oil processing (-2.6%), estimating that oil prices dragged down the PPI month-on-month by -0.1%. At the same time, the real estate market has cooled, coal supply is sufficient and entering the traditional off-season, and prices for steel and coal have also fallen, with corresponding month-on-month PPI for black rolling and coal extraction at -1% and -3.3%, respectively, estimating that steel and coal prices dragged down the PPI month-on-month by -0.3%. However, copper prices contributed positively, estimating that copper prices supported the PPI month-on-month by 0.1%.

The price decline in midstream and downstream industries also constrains the PPI rebound, reflecting the impact of tariff shocks and the low capacity utilization rate in domestic midstream and downstream industries.

The low profit margins in midstream and downstream capacity continue to drag down the corresponding industry PPI, especially under the impact of increased U.S. tariffs, where prices in some export industries have decreased month-on-month. For example, in April, the price in the automotive manufacturing industry fell by 0.5%, while prices in the furniture manufacturing and metal products industries both fell by 0.2%, estimating that the low capacity utilization rate in midstream and downstream industries dragged down the PPI month-on-month by -0.2%.

However, the impact of tariffs on core commodity CPI is limited, and more so driven by the demand release stimulated by the "old-for-new" policy, leading to a simultaneous rise in prices.

In April, the core commodity PPI year-on-year fell by 0.2 percentage points to -1.7%, while the core commodity CPI year-on-year only fell by 0.1 percentage points to 0.1%. The CPI does not collect discounted prices under restrictive conditions, and the goods under the government's "old-for-new" policy are still collected at the original price. Stimulated by the "old-for-new" policy, the recovery in consumer goods demand has driven prices up, with CPI for household appliances and transportation tools rising by 0.1 and 0.2 percentage points year-on-year, respectively.

At the same time, the short-term reduction in the supply of fresh vegetables and fruits has improved the food CPI.

In April, the food CPI year-on-year rose by 1.2 percentage points to -0.2%. The improvement in food prices is related to tightened supply; on one hand, the initial supply of new fruits is reduced, with prices for tubers and fresh fruits rising by 4.7% and 2.2%, respectively; on the other hand, reduced imports have led to a 3.9% increase in beef prices. However, the previous recovery in pig stock has ensured sufficient pork supply, leading to a year-on-year decline in CPI to 5%.

The rise in gold prices supports the increase in prices of other commodities and services, contributing significantly to the overall CPI. The price of gold jewelry has risen by 35.8%, and the CPI for jewelry and other goods and services has increased by 0.4 percentage points year-on-year to 6.6%, contributing 0.4% to the year-on-year CPI.

In addition, the recovery of core service consumption has also supported the service CPI.

In April, the service CPI increased by 0.3% month-on-month, consistent with the same period in previous years. Structurally, the core service CPI rose by 0.44% month-on-month, slightly better than the seasonal figure (0.37% month-on-month). Due to the combined effects of demand recovery and holiday factors, the prices of travel services have risen significantly. Airfare and transportation rental fees increased by 13.5% and 7.3%, respectively, with growth rates exceeding seasonal trends. The largest single item in the service CPI is the virtual rent CPI, which is anchored to changes in rental prices; the high youth unemployment rate continues to suppress the rental CPI. In April, the rental CPI was flat month-on-month, below the seasonal figure (0.2%).

Outlook: The impact of tariff shocks on PPI is greater than on CPI, and attention should be paid to the support of domestic demand recovery for inflation.

Regarding PPI, tariffs may exacerbate the pressure on domestic mid- and downstream production capacity, leading companies to proactively lower prices, which could drag down PPI, with an expected year-on-year decline of -2.9% in the second quarter. For CPI, although increased tariffs may exert significant downward pressure on PPI, goods may also experience proactive price reductions, posing a risk of decline for CPI in the second quarter. However, the April Central Political Bureau meeting emphasized "steadfastly managing our own affairs," and under subsequent policies to promote consumption and expand domestic demand, the recovery of domestic demand may support inflation.

Regular tracking: CPI year-on-year remains flat compared to the previous month, with food CPI and core service CPI both performing better than in previous years.

Food and dining: The CPI year-on-year remains flat compared to the previous month, with a significant rebound in food CPI. In April, the CPI year-on-year was -0.1%, flat compared to the previous month. Among them, the food CPI in March was -0.2, up 1.2 percentage points from the previous month.

Non-food consumer goods CPI: The CPI for household appliances and transportation and communication has rebounded, while the price of fuel for vehicles has significantly declined. The CPI for household appliances and transportation has marginally increased by 0.1 and 0.2 percentage points, respectively, while the CPI for fuel for vehicles was -4.5 percentage points year-on-year.

Service CPI: In April, travel demand rebounded, and the core service CPI performed better than in previous years. In April, the overall service CPI year-on-year remained flat at 0.3%, with the core service CPI rising by 0.44% month-on-month, slightly better than the seasonal figure (0.37% month-on-month).

Risk warning

Food supply is tighter than expected, and energy supply is tighter than expected