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The analysis of the year-on-year CPI growth of 3.8% in the first half of the year suggests that CPI will return to the downward trend, opening more space for monetary policy

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2020-06-10 16:40

China's consumer price index (CPI) for June was released by the National Bureau of Statistics Wednesday. On a month-on-month basis, the CPI fell 0.1 percent in June, while on a year-on-year basis, it rose 2.5 percent. In the first half, the CPI rose 3.8 percent from a year earlier. The industry pointed out that due to the impact of floods and other factors, the CPI increase in June expanded slightly, but it did not change the trend of gradual decline throughout the year, and the CPI increase will fall significantly in the second half of the year, opening more space for monetary policy.

"CPI continued to decline month-on-month, while year-on-year growth expanded slightly." Dong Lijuan, a senior statistician with the National Bureau of Statistics (NBS) City Department, pointed out that year-on-year, food prices rose 11.1 percent, an increase of 0.5 percentage points, contributing about 2.24 percentage points to the CPI rise. Among food items, the price of pork rose 81.6 percent, while the price of fresh vegetables rose 4.2 percent. Non-food prices rose 0.3 percent, 0.1 percentage points lower than the previous month, contributing about 0.24 percentage points to the CPI increase. Among non-food items, the prices of education, culture, entertainment and medical care both rose by 1.9 percent, the prices of transportation and communications dropped by 4.6 percent, and the prices of gasoline and diesel dropped by 19.4 percent and 21.2 percent, respectively.

From a structural point of view, the main factor that led to the slight increase in the year-on-year CPI in June was still the rise in food prices. "Excluding food and energy prices, the core CPI rose 0.9 per cent year on year, 0.2 percentage points slower than the previous month." Dong Lijuan said.

Tang Jianwei, chief researcher at the Financial Research Center of the Bank of Communications, said the overall slight increase in food prices since June was mainly due to floods in many places, which caused short-term supply shortages and rising prices in some regions. Pork prices have also rebounded, although this is only a short-term phenomenon as the national average hog export price is still falling. Non-food inflation eased to 0.3%, while core CPI fell 0.2 percentage points to 0.9%, indicating that overall demand remains weak.

"On the whole, with the recovery of economic and social development, local measures to ensure supply and price stability have been implemented, food supply and demand are basically balanced, and prices will remain stable despite fluctuations." Wen Bin, chief researcher at China Minsheng Bank.

It is worth noting that experts generally believe that CPI will resume its downward trend after a short-term rebound year-on-year, and the price level in the second half of the year will be lower than that in the first half, which also opens up space for monetary policy.

Pork prices, a major factor affecting food price trends, are expected to narrow in the second half of the year as supply increases due to rising pig stocks, Tang said. It will be a slow process for consumer demand to recover, such as tourism, accommodation and life services. Non-food prices are likely to remain low and are expected to gradually stabilize and slightly rise in the future. CPI growth in the second half is expected to be significantly lower than that in the first half. Low price level provides better space for macro - control. In the second half of the year, the focus of monetary policy will be on innovating monetary policy tools that reach directly to the real economy, and targeted support for micro, small and medium-sized enterprises and people in need that are hard hit by the epidemic.

"The downward trend of inflation does not change, and there is room for monetary policy." Wen Bin also said that with the improvement of epidemic prevention and control and the resumption of work and production, market supply and demand are expected to continue to maintain a balance, and inflation will continue to keep the overall downward trend in the future. Reduced inflation will open up more room for monetary policy and help the prudent monetary policy to remain more flexible and appropriate. In the second half of the year, there is room and necessity to cut the required reserve ratio and interest rates. This will not only guide government and corporate bond issuance costs to keep at a low level, reduce direct financing costs, but also help reduce the loan costs of financial institutions.

 

Source: Economic Information Daily

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