November CPI & PPI update: Disappointing figures, but are demand-side problems overblown?

November’s CPI grew a measly 0.2% YoY, the slowest increase since June, while MoM change has been 0.6%. PPI, however, elicited more positive signals, with a deceleration to -2.5% YoY change, which represents a 0.1% MoM increase, extending the two-month streak of PPI improvement.

Markets reacted negatively, with the CSI 300 dropping to 3952.52 from an opening index of 3970. The Hang Seng Index and the SSE Composite both experienced downturns as well, with the former seeing a 0.5% reduction in market cap after the announcement at 9.30 am.[1] The most important catalyst for the market adjustment was likely CPI growth, which was 0.2% below consensus estimates by Bloomberg. This seems rather disappointing after the basket of unprecedented economic policies that were introduced in late September. Investors pointed out that this was indicative of entrenched, persistent deflationary signals that can be deleterious to China’s economic stability in the long run.[2]

In order to judge the effects of the stimulus package on the Chinese economy, it is more suitable to use a MoM comparison rather than a YoY comparison, given that the latter places an oversized premium on historical trends and might therefore downplay the effects of recent policy effects on key indicators. November’s CPI MoM change has been -0.6%. This is, however, largely driven by exogenous circumstances that mainly affected headline inflation. China experienced the hottest November to date since 1961.[3] This has reduced seasonal demand for heating, partly depressing energy prices (-3.8%). Unexpectedly warmer weather has also depressed food prices (-2.7%)—especially vegetable prices (-12.7%)[4]—as crop yields were inflated by such artificial lengthening of the harvesting cycle, creating excess supply that was already boosted by a supply glut in October. Food price deflation contributed to 80% of MoM decrease, while the remaining can be largely attributed to the off-peak consumption season after October’s numerous festivities and holidays (seasonal declines in prices for airfare, hotel accommodations, and travel packages of 8.6%, 7.3%, and 5.6%, respectively.) [5] The MoM decrease is therefore largely attributed to exogenous, extraordinary circumstances that were hinted at in the analysis above.

Fig 8.1. YoY CPI rate in November. National Bureau of Statistics of China. (2024, November 15). Consumer Price Index for October 2024.

Fig 8.2. YoY CPI rate in October. Source: Xinhua News. (2024, December 9). China's consumer prices edge up in November.

We must account for these disparate events on a YoY level. The main decreases in YoY CPI from October to November can be attributed to food prices (-1.1%) and communications (-1.2%), which is heavily energy dependent. These have already been elaborated on above. Once we strip away these factors, YoY core inflation seems to be stable, growing at 0.3%, which is a slight 0.1% increase from October’s number. Inflation numbers therefore have a more positive showing if we incorporate seasonal adjustments. However, the flatness in price levels for certain sectors—and decreases in daily necessities and services (0.1% to -0.3%)—is worrying. Retail sales were likely to still be high given the preliminary results in EV and online sales from “Singles’ Festival”, but November’s Services PMI decrease is indicative of greater competition in the backdrop of improving consumer and business confidence as supply still outstrips demand.[6] It is likely that service contraction was a more direct impulse than waning consumer confidence to the contribution of stagnating PMI. Negative PPI numbers would have also contributed to decreasing retail prices. Consumer confidence might still be high, but supply seems to be overly excessive, ultimately depressing prices even further, especially in easy-to-produce small-ticket items such as discretionary household purchases.

This is further supported by PPI figures, which have seen further marginal improvements. MoM figures increased by 0.1%, while YoY figures decreased by 2.5%, a 0.4% improvement from October’s number. Once again, producers are carefully adjusting their demand according to consumer sentiment, which has been increasing, although at a rather slow pace.

Fig 9. Brent Crude Price change YoY. Source: Trading Economics. (2024). Brent crude oil price.

PPI slowdown (YoY) is also mainly attributable to decreasing oil/energy prices and energy extraction and refinement fields (petroleum and natural gas extraction industry decreased by 12.5%, while the prices in petroleum, coal, and other fuel processing industries decreased by 11.6%). This can be explained by delays with OPEC+ production supply cuts and persistent weakness in domestic consumer demand before the stimulus.[7] YoY price level decreases in precious metal manufacturing and housing materials have decelerated, which is reflected in MoM increases in these industries. These positive signs once again indicate that the stimulus seems to have had a direct impact on the housing market, even though there has been little corroboration on the consumer end as housing sales and house price indexes are predicted to fall further. Even though many of the policies were directed towards debt financing, it was likely that some resources were utilized to complete “white-listed” property projects for inventory buyback by local governments.

Looking forward, it is likely that the CEWC will remain steadfast in upholding their status quo, since the economic data—while missing street estimates—is not as disappointing as it seems. Consumer confidence seems to have improved, but consumer spending remains moderated. More direct forms of financial stimulus would be needed to boost domestic consumption. There are also problems, however, on the supply-side. Weakening Services PMI and falling industrial growth and profits indicate excessive supply. While a short-term solution can be export-oriented growth, greater geopolitical risks in 2025 are likely to hobble this economic pillar. Further rounds of fiscal or monetary stimulus seem unlikely by December. However, it is possible that specifications for the 2024 round of stimulus would be finalized, and rough plans for greater stimulus actions in 2025 would be penciled in.[8]


References

[1] South China Morning Post. (2024, December 9). Hong Kong stocks slide from 4-week high as China deflation persists.

[2] CNBC. (2024, December 9). China consumer prices climb less than expected as economy slows amid trade war worries.

[3] China Meteorological Administration. (2024, December 5). China weather and climate updates.

[4] National Bureau of Statistics of China. (2024, December 9). Latest statistical releases.

[5] National Bureau of Statistics of China. (2024, December 9). Chief Statistician Dong Lijuan's interpretation of November 2024 CPI and PPI data.

[6] S&P Global. (2024, December 4). Caixin China General Services PMI Press Release.

[7] Organization of the Petroleum Exporting Countries. (2024, November 3). Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman extend the 2.2 mbd voluntary adjustments for one month until end of December 2024.

[8] Reuters. (2024, December 9). China announces first monetary policy shift since 2010 to spur growth.