Reasons for June PPI being lower than expected

Summary

First, the June CPI year-on-year is 0.1%, higher than the previous value of -0.1%. The PPI year-on-year is -3.6%, lower than the previous value of -3.3%. The rough simulation of the deflation index based on CPI and PPI at 60% and 40% respectively is -1.38%, unchanged from May, continuing to be at the low point since February 2024 (Figure 1).

Second, the CPI data meets expectations. In the weekly report at the end of June, we estimated the CPI year-on-year at 0.14% based on high-frequency data; the PPI year-on-year was significantly lower than our previous estimate of -3.0%. The June PPI had a base advantage, rebounding 0.2%; however, the year-on-year figure continued to decline compared to high-frequency data. This may be due to a bias in high-frequency data representation of statistical data; secondly, there may be price weaknesses in the midstream and downstream industries that are not easily captured by high-frequency data.

Third, the data indeed reflects this. In June, the PPI for coal processing prices decreased by 5.5% month-on-month, coal mining and washing industry prices decreased by 3.4% month-on-month, and the prices for black metal smelting and rolling processing industries decreased by 1.8% month-on-month, all weaker than the performance of high-frequency data for coking coal, thermal coal, and rebar prices. The reason may be that coal prices rebounded in the last week (Figure 2), while the three weeks prior to statistical sampling were more critical; at the same time, the weakness of steel spot prices compared to futures also led to certain biases in high-frequency data.

Fourth, there are indeed some price anomalies in the midstream and downstream manufacturing industries. The PPI for durable consumer goods fell from 0.1% to -0.1% month-on-month, with the computer, communication, and electronics industry falling from +0.1% to -0.4% month-on-month; textiles and clothing fell from 0.2% to 0% growth month-on-month; home appliances (C-385) are generally classified under the electrical machinery industry (C-38). Given that the PPI for the electrical machinery industry continued to be low at -0.2% month-on-month while prices in fields like photovoltaics improved, home appliances may also experience an expanded month-on-month decline. The reasons behind this may include uncertainty in tariffs affecting exports, as the statistical bureau pointed out that "the uncertainty of the international trade environment affects corporate export expectations, increasing downward pressure on prices in some industries with a high proportion of exports"; secondly, the "618" e-commerce promotion may also be an important reason.

Fifth, the PPI also has some positive characteristics. In June, the PPI for the automotive manufacturing industry increased by 0.2% month-on-month (0% growth in May, -0.5% in April), with the prices for complete gasoline and diesel vehicle manufacturing and new energy vehicle manufacturing increasing by 0.5% and 0.3% month-on-month respectively, indicating that the automotive industry’s "anti-involution" has at least had preliminary effects on the production side (Figure 3). In the previous report "Strict Account Periods are the First Step in Anti-Involution," we pointed out that some views believe the effects of anti-involution will be "slow variables," but two points need attention: first, the current profit situation in the automotive industry is at a relatively unsustainable level; second, the high growth on the supply side in recent years is the result of a combination of factors, and the "anti-involution" process also involves multiple clues such as account periods, capacity, leverage, and prices Sixth, the details of the CPI worth noting mainly include: (1) Alcohol prices decreased by 0.3% month-on-month, marking the second consecutive month of decline; (2) Under the backdrop of "618," clothing prices shifted from an increase to a decrease month-on-month; (3) Rental prices for leased houses rose seasonally from -0.1% to 0.1% month-on-month, remaining basically stable year-on-year; (4) The price of transportation tools decreased by 0.4% month-on-month, indicating that price reductions at the retail end of automobiles are still ongoing; (5) Medical service prices have risen for three consecutive months month-on-month, with a year-to-date year-on-year increase of 0.7%. Medical service prices have historically been in a segment that experiences positive annual price growth; (6) Pork prices decreased by 1.2% month-on-month, but according to high-frequency data from the Ministry of Agriculture, there has been a concentrated upward trend since June 26, which is expected to have some impact on the July CPI.

Seventh, in summary, on one hand, the task of stabilizing prices remains heavy, and the turning point of the simulated deflation index has not yet appeared; the June data shows many clues affecting prices, including not only supply and demand fundamentals but also fluctuations in external demand, commodity price fluctuations, and platform promotions. On the other hand, there are some positive signs for prices, such as the core CPI continuing to rise moderately year-on-year, improvements in coal and meat prices since July, and preliminary positive signals in the automotive manufacturing industry prices. Looking ahead, two clues will be crucial: first, whether the commencement of local projects can rebound, as it is the foundation for the prices of the construction industry and some manufacturing products; second, if "anti-involution" continues to show results, it could further amplify effects through expectation effects.

Main Text

The June CPI year-on-year was 0.1%, higher than the previous value of -0.1%. The PPI year-on-year was -3.6%, lower than the previous value of -3.3%. The roughly simulated deflation index based on CPI and PPI at 60% and 40% respectively is -1.38%, unchanged from May, continuing to be at the low point since February 2024.

A brief review of the current price rhythm: The simulated deflation index for October 2024 is -0.98%, narrowing to -0.88% and -0.86% in November and December respectively, further narrowing to -0.62% in January 2025, and then expanding the decline to -1.30% in February 2025, with March and April at -1.06% and -1.14% respectively, indicating a narrow range of fluctuations; May saw a further expansion of the decline, year-on-year at -1.38%, at a 16-month low (after February 2024). June remained flat compared to May.

The CPI data met expectations, as we estimated a year-on-year CPI of 0.14% based on high-frequency data in the end-of-June weekly report; the year-on-year PPI was significantly lower than our previous estimate of -3.0%. The June PPI had a base advantage, rebounding by 0.2%; however, year-on-year it continued to decline compared to high-frequency data, possibly due to a bias in high-frequency data representation of statistical data, and the weakness in prices of midstream and downstream industries that are difficult to capture with high-frequency data In the previous report "Several Potential Imagination Spaces Hedge Against Fundamental Slowdown," our estimation was: as of the fourth week of June, the expected month-on-month CPI for June is +0.04%, and the year-on-year CPI is +0.14%. It is expected that the year-on-year CPI for June will slightly turn positive. The model predicts that the month-on-month PPI for June will be +0.02%, turning positive compared to May's month-on-month (-0.40%), and with the low base advantage of June's year-on-year PPI (a rebound of 0.2%), it is expected to rise to -3.0% compared to May.

From the data, this is indeed the case. The month-on-month PPI for June shows that coal processing prices are -5.5%, coal mining and washing industry prices are -3.4%, and black metal smelting and rolling industry prices are -1.8%, all weaker than the high-frequency data for coking coal, thermal coal, and rebar prices. The reason may be that coal prices rebounded in the last week, while the statistical sampling in the previous three weeks was more critical; at the same time, the weakness of steel spot prices compared to futures also led to certain deviations in high-frequency data.

The settlement price of coking coal futures (active contract) was 741.5 yuan/ton at the end of May and 842.5 yuan/ton at the end of June. The price of thermal coal at Qinhuangdao Port was 611 yuan/ton at the end of May, 609 yuan/ton on June 23, and 621 yuan/ton at the end of June.

Rebar prices (active contract) month-on-month from May to July were -4.3%, 1.6%, and 1.7%, respectively; the comprehensive price index for Chinese steel was 90.8 at the end of May and 90.1 in the week of June 27.

At the same time, there are indeed some price fluctuations in the mid-to-lower reaches of the manufacturing industry. The month-on-month PPI for durable consumer goods fell from 0.1% to -0.1%, with the computer communication electronics industry month-on-month falling from +0.1% to -0.4%; textiles and clothing fell from 0.2% to 0 growth; home appliances (C-385) are generally classified in the electrical machinery industry (C-38). Given that the PPI of the electrical machinery industry continued to be at a low level of -0.2% while prices in fields like photovoltaics improved, home appliances may also see an expanded month-on-month decline. Behind this may be the impact of tariff uncertainties on exports, as the statistics bureau pointed out that "the uncertainty of the international trade environment affects enterprises' export expectations, and the price downward pressure in some industries with a high proportion of exports in our country has increased"; secondly, the "618" e-commerce promotion may also be an important reason.

The month-on-month PPI for production materials in June was -0.6%, the same as the previous value. Among them, the month-on-month for the mining category was -1.2% (previous value -2.5%), the month-on-month for raw materials industry was -0.7% (previous value -0.9%), and the month-on-month for processing industry was -0.5% (previous value -0.3%).

The month-on-month PPI for living materials was -0.1%, lower than the previous value of 0 growth. Among the living materials PPI, food was -0.3% (previous value -0.1%), clothing had 0 growth (previous value 0.2%), general daily necessities were 0.1% (previous value 0.1%), and durable consumer goods were -0.1% (previous value 0.1%) Of course, the PPI also has some positive characteristics. In June, the PPI for the automotive manufacturing industry increased by 0.2% month-on-month (0% growth in May, -0.5% in April), with the prices of complete gasoline and diesel vehicle manufacturing and new energy vehicle manufacturing rising by 0.5% and 0.3% respectively, indicating that the "anti-involution" in the automotive sector has at least had a preliminary effect on the production side. In the previous report "Strict Account Periods are the First Step in Anti-involution," we pointed out that some opinions believe the effects of anti-involution will be "slow variables," but two points need attention: first, the current profit situation in the automotive industry is at a relatively unsustainable level; second, the high growth on the supply side in recent years is the result of a combination of various factors, and the "anti-involution" process also involves multiple clues such as account periods, capacity, leverage, and prices.

The National Bureau of Statistics pointed out: The deepening construction of a unified national market has led to a narrowing of the year-on-year price decline in some industries. The efforts to curb low-price disorderly competition among enterprises have intensified, the exit of backward production capacity and the gradual improvement of product quality are being promoted, with the prices of complete gasoline and diesel vehicle manufacturing and new energy vehicle manufacturing rising by 0.5% and 0.3% respectively, and the year-on-year decline narrowing by 1.9 and 0.4 percentage points compared to last month; the price of photovoltaic equipment and electronic components manufacturing decreased by 10.9% year-on-year, with the decline narrowing by 1.2 percentage points; the price of lithium-ion battery manufacturing decreased by 4.8% year-on-year, with the decline narrowing by 0.2 percentage points.

Details worth noting in the CPI include: (1) Alcohol prices decreased by 0.3% month-on-month, marking the second consecutive month of decline; (2) Under the backdrop of "618," clothing prices shifted from rising to falling month-on-month; (3) Rental prices for leased housing rose seasonally from -0.1% to 0.1% month-on-month, remaining stable year-on-year; (4) The price of transportation tools decreased by 0.4% month-on-month, indicating that price reductions in the automotive retail sector are still ongoing; (5) Medical service prices have risen for three consecutive months, with a cumulative year-on-year increase of 0.7%. Medical service prices have historically been in a segment that consistently experiences positive annual price growth; (6) Pork prices decreased by 1.2% month-on-month, but according to high-frequency data from the Ministry of Agriculture, there has been a concentrated upward trend since June 26, which is expected to have some impact on the July CPI.

In June, the month-on-month CPI for alcohol was -0.3%, the previous value was -0.3%, and the month-on-month value for April was zero growth. In June, the month-on-month CPI for pork prices was -1.2%, the previous value was -0.7%.

In June, the month-on-month CPI for clothing was -0.1%, the previous value was 0.6%; the month-on-month CPI for rental housing was 0.1%, the previous value was -0.1%.

In June, the month-on-month CPI for transportation tools was -0.4%, the previous value was -0.4%; the month-on-month CPI for medical service prices was 0.3%, unchanged from the previous value of 0.3%.

In summary, on one hand, the task of stabilizing prices remains heavy, and the turning point of the simulated deflation index has not yet appeared; on the other hand, the June data shows that there are many clues affecting prices, including not only the basic supply and demand but also fluctuations in external demand, commodity price fluctuations, platform promotions, and more On the other hand, there are some positive signs regarding prices, such as the core CPI continuing to rise moderately year-on-year, improvements in coal and meat prices since July, and initial positive signals in the automotive manufacturing industry prices. Looking ahead, two clues will be crucial: first, whether the commencement of local projects can rebound, as it forms the basis for construction and some manufacturing product prices; second, the effectiveness of "anti-involution," which, if it continues to show results, can further amplify effects through expectation effects.

Author of this article: Guo Lei, Source: Guo Lei Macro Tea Room, Original title: "[Guangfa Macro Guo Lei] Reasons for June PPI Being Below Expectations"

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