The PPI reflects the industrial purchase price and the ex-factory price of the product
The rise and fall of the PPI reflects the strength of the market demand for industrial products. It also has a certain degree of enlightenment on the good and bad economy.
The production price index is referred to as the “Producer Price Index (PPI)” in the country
The survey scope of the National Bureau of Statistics includes 1,638 basic industries or product classifications, involving prices of more than 20,000 industrial products.
The rise in PPI is a sign of active market demand. Manufacturers respond to market demand by expanding production scale and increasing purchases, thereby pushing up production prices. We call it “PPI inflation”, which is a sign of a better economy.
On the contrary, the decline in PPI reflects the lack of market demand, and manufacturers have reduced their purchases, which has brought down production prices. The Mainland calls this the “PPI deflation.”
Traditionally, PPI and CPI have a certain relationship. The so-called “wool comes from sheep”, companies usually pass on production costs to consumers, so as production prices rise, consumer prices will rise sooner or later.
Poor external demand affects demand
However, in recent years, CPI has risen and PPI has fallen in the Mainland, mainly due to the unique nature of China’s economic environment. First of all, China is a large manufacturing country and is known as the “world’s factory”. Therefore, its industrial products are not only sold domestically, but also a large proportion of which are exported–that is, exported to foreign markets.
However, on the one hand, in recent years, China has fallen into a trade war, and tariffs have risen, affecting export performance. In addition, foreign economies are also showing signs of slowing down. For example, the Eurozone ’s October retail sales recorded -0.6% month-on-month, worse than the expected -0.5%, and the September value was revised down from + 0.1% to -0.2%; In the United States, the monthly growth of retail sales has repeatedly declined from + 1.6% in March. It saw a red-to-0.3% in September. Although it rebounded to + 0.3% in October, the market is waiting to see whether the numbers in November will continue to stabilize in the peak sales season , But the expected value is only + 0.5%, which is still a sharp drop from the year’s high.
In fact, the recently announced year-on-year growth rate of November exports in China was -1.1%, which also reflects the weak performance of external demand. No wonder the PPI is still deeply negative.
As for the mainland CPI, it recorded a + 4.5% in November, which is very different from the PPI performance. The main reason is that food prices (+ 19.1%), especially pork prices, have risen sharply (+ 110%). In fact, monthly data also shows that retail growth has fallen. However, the growth rate also outperforms solid investment and industry, and it can be seen that the mainland’s consumer power will have certain support for CPI.