Worry about inflation scissors
Global inflation is rising steadily, and it is accelerating.
The supply constraints brought about by the epidemic and the world’s extremely loose monetary policy are spawning a super “commodity feast” and pushing up global inflation. In May, the U.S. CPI increased by 5% year-on-year, a sharp increase of 3.6 percentage points from the end of 2020, setting a new high since September 2008.
The rise in inflation in China is mainly concentrated in the industrial product sector. In May, the PPI increased by 9% year-on-year, setting a new high since October 2008, with a month-on-month increase of 1.6%, a record month-on-month growth rate. The inflation scissors difference-the difference between PPI and CPI growth rate is also the largest on record.
Optimists believe that the higher PPI has not been transmitted to the CPI, indicating that China’s overall inflationary pressure is not large. But the implicit economic and policy implications may not be so simple. The new high inflation scissors means that most of the fruits of the economic recovery after the epidemic have been obtained by the upstream. The recovery of the entire economy appears to be extremely uneven, and economic momentum is in the entire industry chain. The transmission of the economy is blocked, and these may affect the sustainability of this round of economic recovery.
PPI accelerates upward
Back to the end of 2020, with the improvement of the epidemic, the global economy is recovering rapidly, and commodity prices have risen from the bottom. It is easy to foresee that PPI growth will increase in 2021, but the market generally expects this increase will It is mild.
For example, in the annual outlook report of mainstream securities firms at the end of 2020, CITIC Securities predicts that in the first and second quarters of 2021, PPI will increase by 0.2% and 4.8% year-on-year, respectively, and PPI will increase by 2.4% in 2021; CICC predicts that 2021 In the first and second quarters of the year, the PPI will increase by -1.3% and 2.7% year-on-year, respectively. In 2021, the PPI will increase by 1.5%.
The actual PPI must have exceeded expectations. It took only 5 months for the PPI to rise rapidly from -0.4% in December 2020 to 9% in May 2021. Among them, the average growth rate of PPI in the first quarter reached 2.1%, and the average growth rate of PPI in the second quarter may reach about 8%.
The rapid rise in commodity prices in this round has greatly exceeded market expectations, and the prices of some major commodities have hit record highs one after another. The price of LME copper rose from the bottom of the epidemic at US$4,370/ton to US$10,700/ton, an increase of over 140%. The price of copper also surpassed the high point of “four trillion”, setting a record high. LME aluminum prices rose from the bottom of the epidemic at US$1,455/ton to US$2,600/ton, an increase of nearly 80%. Aluminum prices basically returned to the high point of the previous cycle in 2017. The price of Brent oil rose from the bottom of US$20/barrel to US$73/barrel, an increase of more than 260%, fully returning to the level before the epidemic. The price of SHFE rebar once rose to 6,200 yuan/ton, doubling the bottom of the epidemic and setting a record high. The price of DCE iron ore rose from the bottom of 540 yuan/ton to 1,350 yuan/ton, setting a record high with an increase of 150%.
Why is this round of commodity rises faster than in previous cycles? Supply-side factors may have played a more dominant role. On the one hand, the epidemic has caused major disturbances in the global supply of bulk commodities; on the other hand, after the supply-side reforms in the previous years, the supply capacity of many domestic industrial products has shrunk significantly.
Essence Securities believes that when the supply is tightened, the price elasticity of demand rises rapidly, resulting in a “non-linear” price increase. With every little increase in demand, the price increase is much greater. “The price index for reorganization has risen rapidly since 2020, while the price center of non-reorganization has moved down slightly. This differentiation reflects the impact of the supply level.”
The rapid rise in commodity prices has attracted the attention of decision-makers. On May 19, the executive meeting of the State Council emphasized that “we must attach great importance to the adverse effects of rising commodity prices, implement the arrangements of the Party Central Committee and the State Council, and in accordance with precise control requirements, focus on key and comprehensive measures to ensure the supply of commodities in accordance with the requirements of precise regulation and control. To curb unreasonable price increases, and work hard to prevent transmission to consumer prices.”
Since mid-May, the prices of major commodities have fallen from high levels. Many analysts believe that the year-on-year growth rate of PPI will peak. CITIC Securities judged, “The current PPI may have been at a high point during the year. If the supply and demand gap is effectively reduced as the global economy improves, and the margin of superimposed liquidity is tightened, then this round of global industrial product prices may be approaching. Ending.”
The best time for making money in the cyclical sector may have come to an end. Huachuang Securities believes that at this stage when the PPI basically peaked year-on-year, but the PPI index is still rising, although upstream companies have a dominant share of profits, the profit growth rate has basically passed the fastest growth point. During this period, the trend of the cyclical index basically bid farewell to the unprecedented outbreak of the market. The volatility has increased significantly, and there may even be a sharp retracement, making it difficult to grasp.
However, the decline of bulk commodities in the short term appears to be relatively limited, and the current overall price level is still higher than in April. Essence Securities believes that global commodity prices may fall in the second half of the year, but the center and bottom of the fall are significantly higher than before the epidemic. In the next two to three years, commodity prices may experience a central rise. The main reasons behind this process are Power comes from the supply level.
The hidden worries of the inflation scissors gap
In this round of price increases, what is even more worrying is that the inflation scissors gap hit a record high. Since the CPI rose by only 1.3% year-on-year in May, the difference between the growth rate of PPI and CPI reached 7.7%, the largest in history.
In the previous economic recovery cycles, the PPI has risen very fast, reflecting greater volatility. In the recovery cycle from 2016 to 2017, the PPI rose from -0.8% to 7.8% in only 6 months; in the recovery cycle from 2009 to 2010, the PPI rose from -5.9% to 7 months in 7 months %.
Since the rise of CPI tends to be relatively lagging, it forms a stage where PPI accelerates upward, and the scissors gap between inflation is rapidly expanding. However, the current round of inflation scissors gap appears to be even greater, which exposed some hidden worries about economic recovery and policies.
First of all, the widening of the inflation scissors means that most of the results of this round of economic recovery have been obtained by upstream companies. PPI represents the product price of upstream companies, and CPI represents the price of downstream consumer products. The rapid rise of PPI has driven upstream profits to explode, but the slow rise of CPI indicates that the downstream cannot quickly absorb the increase in raw material prices through price increases, and the profits of downstream companies will be squeezed.
From January to April, the national industrial enterprises above designated size achieved a total profit of 2594.35 billion yuan, a year-on-year increase of 1.06 times, an increase of 49.6% over the first four months of 2019, and an average increase of 22.3% over the two years.
Judging from the quarterly reports of listed companies, the performance growth of upstream steel, nonferrous, chemical, mining and other industries is significantly better than that of downstream industries such as textiles, home appliances, and real estate.
Most upstream industrial enterprises are state-owned enterprises with a certain monopoly position, while downstream enterprises are more private enterprises with a high degree of marketization. This unbalanced distribution of profits in the industrial chain has actually caused a certain degree of “national advancement and civil retreat”, and it is even more difficult for private enterprises to enjoy the fruits of this round of economic recovery.
Chart: Inflation scissors gap hits a record high
Data source: Wind
Second, the expansion of the scissors gap shows that the transmission of the entire price chain is severely blocked, which is reflected in the serious lack of consumption recovery. Compared with industry and exports, the strength of consumption recovery is relatively weak. In April 2021, the total retail sales of social consumer goods increased by only 4.3% compared to the two-year average growth rate of the same period in 2019, while the growth rate of consumption in 2019 before the epidemic was 8%. The average quarter-on-quarter growth rate of total retail sales of consumer goods was 0.45%, which was significantly lower than the end of 2019 before the epidemic.
Since the impact of the epidemic on various sectors of the economy is not the same, the impact on the “contact economy” is significantly greater than the “non-contact economy”, and the recovery speed of contact consumption after the epidemic is slower, such as catering, tourism, entertainment and other consumption It has not yet returned to its pre-epidemic level.
In the future, the contradiction of the scissors gap may be eased.
Policy will be in a dilemma
In the past economic cycles, economic overheating occurred at the same time as the rapid rise of PPI and CPI. Macroeconomic policies only need to be tightened as a whole to deal with them.
Now the economic recovery is not overheated, and there is a big imbalance in the recovery. The CPI is still at a low level, but the PPI is high. I am afraid that the overall macroeconomic policy should not be too tight, but we must find a way to solve this structural contradiction. , The policy is more difficult.
CITIC Securities judges that inflationary pressures will gradually weaken after the second quarter. Under the circumstance that “the economy has not returned to normal and inflation risks are relatively controllable”, the main goal of the aggregate policy will still focus on stable growth and strive to promote the post-epidemic period. The economic operation of the country is steadily strengthened.
Huachuang Securities believes that historically full inflation can trigger monetary policy tightening. Among them, PPI rose above 6% year-on-year, CPI rose above 3% year-on-year, and core CPI exceeded 2% year-on-year. Only when at least three of them meet the second will trigger a comprehensive tightening of monetary policy. The current inflation does not meet the conditions for tightening monetary policy.
