Interpretation of July Price Data: Patience is Required for Anti-Competition Effects

Core Viewpoint

In July, the CPI rose by 0.4% month-on-month (previous value -0.1%), and remained flat year-on-year (previous value +0.1%). The average month-on-month value for the same period over the past five years (with the Spring Festival in January, same below) was 0.2%. Among them, non-food prices rose by 0.5% month-on-month (previous value flat), with an average month-on-month value of 0.2% over the past five years; food prices fell by 0.2% month-on-month (previous value -0.4%), with an average month-on-month value of 0.3% over the past five years. The core CPI rose by 0.4% month-on-month and 0.8% year-on-year, with the increase expanding for three consecutive months. The PPI fell by 0.2% month-on-month (previous value -0.4%) and decreased by 3.6% year-on-year (previous value -3.3%), with a narrowing month-on-month decline and the same year-on-year decline as last month.

The strong demand for summer travel and rising energy prices provided strong support for non-food items: In July, service prices rose by 0.6% month-on-month, contributing approximately 0.26 percentage points to the CPI month-on-month increase, accounting for more than 60% of the total CPI increase. Among them, influenced by the peak travel season in summer, the prices of air tickets, tourism, hotel accommodation, and vehicle rental rose by 17.9%, 9.1%, 6.9%, and 4.4% month-on-month, respectively, all exceeding seasonal levels, collectively contributing approximately 0.21 percentage points to the CPI month-on-month increase. In terms of inter-regional travel, the average daily number of flights on domestic routes in July rose by 13.1% month-on-month; in terms of urban transportation activity, subway passenger traffic in 12 major cities rose by 4.69% month-on-month in July. Additionally, influenced by fluctuations in international oil prices, energy prices rose by 1.6% month-on-month, contributing approximately 0.12 percentage points to the CPI month-on-month increase, with fuel prices for vehicles rising by 3.5% month-on-month (previous value 0.3%), and the average month-on-month value for the same period over the past five years being 1.2%.

Consumption-boosting policies combined with initial results from low-price competition regulation have led to vehicle prices stabilizing after five months of decline: The third batch of funds for replacing old consumer goods with new ones was allocated in July, driving sustained demand recovery. Coupled with the end of the "618" promotional event, prices for fuel vehicles and new energy vehicles stabilized after more than five months of decline, leading to vehicle prices remaining flat month-on-month (previous value -0.4%). On July 1, the sixth meeting of the Central Financial Committee emphasized the need to regulate low-price disorderly competition among enterprises in accordance with the law. On July 18, the Ministry of Industry and Information Technology and three other ministries jointly held a symposium on the new energy vehicle industry to deploy further work to standardize competition order in the new energy vehicle industry, indicating initial improvements in low-price disorderly competition in the automotive industry. In other items, the prices of communication tools turned from a six-month month-on-month decline to an increase of 0.3% this month, while the month-on-month price increases for household appliances, daily household goods, durable consumer goods for entertainment, and personal care products ranged from 0.5% to 2.2%; clothing and traditional Chinese medicine prices fell by 0.3% and 0.5% month-on-month, respectively.

The month-on-month increase in pork and fresh vegetables was lower than seasonal levels, and some food prices continued to decline: In July, pork prices rose by 0.9% month-on-month (previous value -1.2%), with the average month-on-month value for the same period over the past five years being 2%. On the supply side, the willingness to sell from the breeding end is relatively low, leading to tight market supply of live pigs, making it difficult for downstream procurement, which forced prices to rise From the demand side, after entering July, the national temperature generally increased, coupled with universities gradually starting their summer vacations, resulting in a significant decline in terminal demand. In the short term, theoretically, August is still in the capacity release period, and high temperatures and rainy weather may occur frequently. The probability of pig disease recurrence increases, which may lead to a faster pace of livestock sales, requiring continuous attention to changes in the sales rhythm. In July, high temperatures and rainfall were higher than the same period in previous years. At the same time, factors such as increased costs due to storage difficulties and long-distance transportation led to a seasonal rise in vegetable prices, with fresh vegetable prices rising by 1.3% month-on-month (previous value 0.7%), lower than the seasonal decline of 2.8% over the past five years. In addition, egg prices fell by 0.3% month-on-month (previous value -2.9%), and fresh fruit prices fell by 3.4% month-on-month (previous value -3.3%). In July, summer fruits were still at their peak of concentrated market entry, and the overall supply was ample, causing prices to decline.

Core prices continued to rise year-on-year: In July, the core CPI rose by 0.4% month-on-month and 0.8% year-on-year, with the increase expanding by 0.1 percentage points compared to the previous month, the highest since March 2024. Among them, the prices of gold and platinum jewelry rose by 37.1% and 27.3% year-on-year, respectively, collectively contributing approximately 0.22 percentage points to the year-on-year increase in CPI; service prices rose by 0.5% year-on-year, maintaining a stable increase, contributing about 0.19 percentage points to CPI; the prices of fuel vehicles and new energy vehicles fell by 2.6% and 1.9% year-on-year, respectively, with the declines being the smallest in nearly 34 months and 28 months. According to our estimates, the core CPI accounts for about 72.5% of the CPI, allowing us to estimate that the contributions of gold and platinum jewelry and service prices to the year-on-year growth rate of core CPI are 0.3 and 0.26 percentage points, respectively, together contributing 70% of the year-on-year increase in core CPI in July.

The month-on-month decline in PPI narrowed, while the year-on-year decline remained the same as last month: The phased decline in demand for coal and other energy sources dragged down the prices of black metals, while the development of high-tech industries drove up the prices of non-ferrous metals. In the black metal sector, increased high temperatures and rainy weather in summer slowed down the construction progress of real estate and infrastructure projects, affecting the demand for building materials. The prices of non-metallic mining and mineral products fell by 0.8% and 1.4% month-on-month, respectively, while the prices of black metal mining and smelting and rolling industries fell by 1.1% and 0.3%. From high-frequency data, in July, indicators such as rebar apparent demand, domestic crude steel production, wire rod operating rates, and float glass operating rates were all below the levels of the same period last year. Increased rainfall in some areas led to abundant river water, significantly enhancing the supplementary role of hydropower to thermal power, reducing the demand for electricity coal, and causing the prices in the coal mining and washing industry to fall by 1.5%, while the prices in the electricity and heat production and supply industry fell by 0.9%. In the non-ferrous sector, international input factors and domestic policies promoting consumption and equipment updates continued to take effect, releasing demand for some consumer goods and equipment manufacturing products, driving related industry prices to continue rising month-on-month, with non-ferrous metal mining rising by 0.7% (previous value 1.3%) and non-ferrous metal smelting and rolling industries rising by 0.8% (previous value -0.2%). In terms of crude oil, the rise in international crude oil prices affected the domestic oil-related industry prices, with the prices in the oil and gas extraction industry rising by 3% month-on-month (previous value 2.6%), and the prices in the oil, coal, and other fuel processing industries rising by 1.2% (previous value -0.6%) In the downstream industrial chain of crude oil, the price of chemical fibers decreased by 0.7% month-on-month (previous value 0.1%), and the rubber and plastic industries decreased by 0.4% month-on-month (previous value -0.3%), indicating that downstream demand remains weak.

CPI operates at a low level, and PPI continues to be under pressure: this month, CPI exceeded expectations month-on-month and remained flat year-on-year, while in August it may still be under pressure due to tailing factors. Looking ahead, first, pig prices are stable with a slight decline, and food prices are overall stable. In late July, the Ministry of Agriculture and Rural Affairs held a symposium on the high-quality development of the pig industry, requiring a reasonable elimination of breeding sows and a proper reduction in the breeding sow inventory. Considering that pig farming has been profitable for 14 consecutive months since May last year, it is unlikely that private enterprises will significantly eliminate sow capacity, and the elimination of sows will be a long-term slow process, with significant supply pressure on pigs still in the short term. Second, the main challenges are oversupply and weak demand growth, which may put pressure on oil prices. On the supply side, on August 3, OPEC+ officially approved an increase in production quotas by 547,000 barrels per day in September based on August levels, accelerating supply release. On the demand side, the IEA's July report estimated that global oil demand expectations this year would be significantly revised down from 1.03 million barrels per day to 700,000 barrels per day, previously estimated at 720,000 barrels per day, marking the lowest growth rate since 2009. Third, increased efforts to govern low-price disorderly competition among enterprises may help PPI rebound, but the transmission effect to CPI remains to be observed. Fourth, the endogenous momentum of consumption is weak, and the core CPI has limited room for recovery.

This month, PPI continued to remain at a low level year-on-year, and the degree of improvement in PPI may be limited going forward, with PPI unlikely to turn positive this year. First, the real estate market continues to weaken, and local land revenue is lower than expected, leading to infrastructure investment falling short of expectations. The real estate market has been continuously weakening since the second quarter, with the cumulative sales area and sales amount of commercial housing in the first six months decreasing by 3.5% (previous value -2.9%) and 5.5% (previous value -3.8%) year-on-year, respectively. High-frequency data shows that the year-on-year transaction area of commercial housing in 30 major cities in July was -18.6%, compared to -8.4% in June. Second, microeconomic entities lack momentum, with weak investment and consumption willingness among enterprises and residents. Third, the manufacturing capacity utilization rate continues to bottom out, and the ongoing optimization of market competition order supports the improvement effect of PPI, which remains to be observed. In the second quarter, China's industrial capacity utilization rate was 74%, showing a downward trend year-on-year and month-on-month, with demand still weak. Currently, the continuous optimization of the domestic market competition order has led to a narrowing of price declines in related industries, but the sustained improvement effect remains to be observed.

Main Text

1. CPI: Service Prices Support Month-on-Month Exceeding Expectations

In July, CPI rose by 0.4% month-on-month (previous value -0.1%), remained flat year-on-year (previous value +0.1%), and the year-on-year increase was higher than the consensus expectation of -0.1% from Wind. The average month-on-month value for the same period over the past five years (with the Spring Festival in January, the same below) was 0.2%, of which non-food prices rose by 0.5% month-on-month (previous value flat), with the average month-on-month value over the past five years being 0.2%; food prices decreased by 0.2% month-on-month (previous value -0.4%), with the average month-on-month value over the past five years being 0.3%. Core CPI rose by 0.4% month-on-month and 0.8% year-on-year, with the increase expanding for three consecutive months

First, the strong demand for summer travel and rising energy prices provide strong support for non-food items. In July, service prices increased by 0.6% month-on-month, contributing approximately 0.26 percentage points to the month-on-month increase in CPI, accounting for more than 60% of the total CPI increase. Among them, influenced by the peak summer travel season, the prices of airline tickets, tourism, hotel accommodation, and vehicle rental increased month-on-month by 17.9%, 9.1%, 6.9%, and 4.4%, respectively, all exceeding seasonal levels, collectively contributing approximately 0.21 percentage points to the month-on-month increase in CPI. In terms of inter-regional travel, the average daily number of flights on domestic routes in July increased by 13.1% month-on-month; regarding urban transportation activity, subway passenger traffic in 12 major cities increased by 4.69% month-on-month in July. Additionally, influenced by fluctuations in international oil prices, energy prices rose by 1.6% month-on-month, contributing approximately 0.12 percentage points to the month-on-month increase in CPI, with fuel prices for vehicles rising by 3.5% (previous value 0.3%), while the average month-on-month value for the same period over the past five years was 1.2%.

Second, the combination of consumption-boosting policies and initial results from low-price competition regulation has led to vehicle prices stabilizing after five months of decline. The third batch of funds for replacing old consumer goods with new ones was allocated in July, driving a continuous recovery in demand. Coupled with the end of the "618" promotional event, the prices of fuel-powered and new energy vehicles shifted from a decline of over five months to stabilization, leading to vehicle prices remaining flat month-on-month (previous value -0.4%). On July 1, the sixth meeting of the Central Financial Committee emphasized the need to regulate low-price disorderly competition among enterprises according to laws and regulations. On July 18, the Ministry of Industry and Information Technology and two other ministries jointly held a symposium on the new energy vehicle industry to deploy further work to standardize competition order in the new energy vehicle industry, indicating initial improvements in low-price disorderly competition in the automotive sector. In other categories, the prices of communication tools shifted from a month-on-month decline for six consecutive months to an increase of 0.3% this month, while the month-on-month price increases for household appliances, daily household goods, durable consumer goods for entertainment, and personal care products ranged from 0.5% to 2.2%; clothing and traditional Chinese medicine prices decreased month-on-month by 0.3% and 0.5%, respectively.

Third, the month-on-month increases in pork and fresh vegetables are lower than seasonal levels, and some food prices continue to decline. In July, pork prices increased by 0.9% month-on-month (previous value -1.2%), while the average month-on-month value for the same period over the past five years was 2%. On the supply side, the willingness to sell from the breeding sector is relatively low, leading to tight market supply of live pigs and increased difficulty in downstream procurement, forcing price increases for purchases, which supports stronger pork prices. On the demand side, as July progresses, national temperatures generally rise, and with universities gradually going on vacation, terminal demand has significantly declined. In the short term, theoretically, August is still in the capacity release period, and high temperatures and rainy weather may occur frequently, increasing the probability of pig disease recurrence, which may lead to a faster selling pace in the breeding sector, necessitating continuous monitoring of changes in the selling pace. In July, high temperatures and rainfall were above the same period in previous years, and influenced by factors such as increased costs due to storage difficulties and long-distance transportation, vegetable prices experienced seasonal increases, with fresh vegetable prices rising by 1.3% month-on-month (previous value 0.7%), lower than the seasonal decline of 2.8% over the past five years In addition, egg prices fell by 0.3% month-on-month (previous value -2.9%), and fresh fruit prices fell by 3.4% month-on-month (previous value -3.3%). In July, summer fruits are still at the peak of concentrated market entry, and the overall supply is ample, leading to a price decline.

Fourth, core prices continued to rise year-on-year. In July, the core CPI rose by 0.4% month-on-month and by 0.8% year-on-year, an increase of 0.1 percentage points compared to the previous month, the highest since March 2024. Among them, the prices of gold and platinum jewelry rose by 37.1% and 27.3% year-on-year, respectively, contributing approximately 0.22 percentage points to the year-on-year increase in CPI; service prices rose by 0.5% year-on-year, maintaining a stable increase, contributing about 0.19 percentage points to the CPI increase; the prices of fuel vehicles and new energy vehicles fell by 2.6% and 1.9% year-on-year, respectively, the smallest declines in nearly 34 months and 28 months. According to our estimates, the core CPI accounts for about 72.5% of the CPI, and it can be estimated that the contributions of gold and platinum jewelry and service prices to the year-on-year growth rate of core CPI are 0.3 and 0.26 percentage points, respectively, together contributing 70% to the year-on-year increase in core CPI in July.

II. PPI: Demand Phase Downturn Drags Down Year-on-Year Continuation at Low Levels

In July, the PPI fell by 0.2% month-on-month (previous value -0.4%), marking the first narrowing of the month-on-month decline since March, and fell by 3.6% year-on-year (previous value -3.6%), mainly affected by the phase-down of demand for coal and other energy and the price decline in some export industries. On one hand, the seasonal downturn in demand for coal and other energy dragged down the prices of black metals; on the other hand, the uncertain foreign trade environment dragged down prices in industries such as computers, automobiles, and electrical equipment. In addition, while crude oil prices rose, prices in downstream industries such as chemical fibers and rubber plastics fell, indicating that downstream demand remains weak.

The month-on-month decline in PPI has narrowed, and the year-on-year decline remains the same as last month. The phase-down of demand for coal and other energy drags down the prices of black metals, while the development of high-tech industries drives up the prices of non-ferrous metals. In the black metal sector, increased summer rainfall and high temperatures have slowed down the construction progress of real estate and infrastructure projects, affecting the demand for building materials. The prices of non-metallic mining and mineral products fell by 0.8% and 1.4% month-on-month, respectively, while the prices of black metal mining and smelting and rolling industries fell by 1.1% and 0.3%. From high-frequency data, in July, indicators such as apparent demand for rebar, domestic crude steel production, wire rod operating rates, and float glass operating rates were all below the same period last year. Increased rainfall in some areas has led to abundant river water, significantly enhancing the supplementary role of hydropower to thermal power, reducing demand for electricity coal, and leading to a 1.5% decline in the prices of coal mining and washing industries, and a 0.9% decline in the prices of electricity and heat production and supply industries In the non-ferrous sector, international input factors and domestic policies promoting consumption and equipment upgrades continue to take effect, leading to the release of demand for some consumer goods and equipment manufacturing products, which has driven related industry prices to continue rising month-on-month. The non-ferrous metal mining and selection industry increased by 0.7% (previous value 1.3%), while the non-ferrous metal smelting and rolling processing industry rose by 0.8% (previous value -0.2%). In terms of crude oil, the rise in international crude oil prices has impacted domestic oil-related industry prices, with the oil and gas extraction industry prices rising by 3% month-on-month (previous value 2.6%), and the oil, coal, and other fuel processing industry prices increasing by 1.2% (previous value -0.6%). In the downstream industrial chain of crude oil, chemical fiber prices fell by 0.7% month-on-month (previous value 0.1%), and rubber and plastic industry prices decreased by 0.4% (previous value -0.3%), indicating that downstream demand remains relatively weak.

In July, food prices remained flat month-on-month, while prices for durable goods, general daily necessities, and clothing decreased by 0.6%, 0.2%, and 0.1%, respectively. Among them, affected by export uncertainties, prices in some export industries fell month-on-month, with prices in the computer communication and other electronic equipment manufacturing industry decreasing by 0.4%, the automobile manufacturing industry prices dropping by 0.3%, the electrical machinery and equipment manufacturing industry prices falling by 0.2%, and the general equipment manufacturing industry prices decreasing by 0.2%. Additionally, the efforts to curb low-price disorderly competition among enterprises have intensified, and the gradual improvement of product quality has led to a narrowing of month-on-month price declines in the coal mining and washing industry, black metal smelting and rolling processing industry, photovoltaic equipment and components manufacturing, cement manufacturing, and lithium-ion battery manufacturing by 1.9, 1.5, 0.8, 0.3, and 0.1 percentage points, respectively, resulting in a total reduction in the month-on-month impact on PPI by 0.14 percentage points compared to the previous month.

III. CPI Operating at Low Levels, PPI Under Continued Pressure

This month's CPI exceeded expectations month-on-month and remained flat year-on-year, while in August, it may still be under pressure due to tail effects. Looking ahead, first, pig prices are stable with a slight decline, and food prices are overall stable. In late July, the Ministry of Agriculture and Rural Affairs held a symposium on the high-quality development of the pig industry, where it was requested to reasonably eliminate breeding sows and appropriately reduce the stock of breeding sows. Considering that pig farming has been profitable for 14 consecutive months since May last year, the probability of private enterprises significantly eliminating sow capacity to benefit competitors is low, and the elimination of sows will be a long-term slow process, with significant supply pressure for live pigs still in the short term. Second, the main challenges are oversupply and weak demand growth, which may put pressure on oil prices. On the supply side, on August 3, OPEC+ officially approved an increase in production by 547,000 barrels per day in September based on August quotas, accelerating supply release. On the demand side, the IEA's July report estimated that global oil demand expectations would be significantly revised down from 1.03 million barrels per day to 700,000 barrels per day, previously estimated at 720,000 barrels per day, marking the lowest growth rate since 2009. Third, the intensified efforts to curb low-price disorderly competition among enterprises may help PPI rebound, but the transmission effect to CPI remains to be observed Fourth, the internal driving force of consumption is relatively weak, and the core CPI has limited room for recovery.

This month's PPI continues to remain at a low level year-on-year, and the subsequent improvement in PPI may be limited, with PPI unlikely to turn positive this year. First, the real estate market is still weakening, and local land revenue falling short of expectations has led to infrastructure investment being below expectations. The real estate market has continued to weaken since the second quarter, with the cumulative sales area and sales volume of commercial housing in the first six months down 3.5% (previous value -2.9%) and 5.5% (previous value -3.8%) year-on-year, respectively. High-frequency data shows that the year-on-year transaction area of commercial housing in 30 major cities in July was -18.6%, compared to -8.4% in June. Second, the microeconomic entities lack momentum, with weak corporate investment and consumer spending willingness. Third, the manufacturing capacity utilization rate continues to bottom out, and the ongoing optimization of market competition order supports the observation of PPI improvement effects. In the second quarter, China's industrial capacity utilization rate was 74%, showing a downward trend both year-on-year and month-on-month, with demand still weak. Currently, the continuous optimization of the domestic market competition order has led to a narrowing of price declines in related industries, but the sustained improvement effect remains to be observed.

This article is sourced from: China Galaxy Macro, original title: "Patience is Needed for Anti-Overwork Effects — Interpretation of July Price Data"

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