Stagflation and its measurement
Stagflation refers to the economic phenomenon of economic stagnation, unemployment and inflation rising at the same time. “Stagnation” represents economic stagnation, “inflation” represents serious inflation.
In measuring stagflation, considering the two dimensions of inflation and economic development, Professor Ye Qixiang and Professor Xu Xiuhong found that in developed countries, 4% is usually regarded as the boundary of high inflation, and the economic growth rate below 3% accompanied by unemployment rate of more than 6% is regarded as the sign of economic stagnation. There are different opinions on the quantitative research of stagflation in China. We believe that as an economic cycle phenomenon, stagflation needs to be observed by lengthening the time axis from a macro perspective based on the characteristics of cycle operation.
Stagflation in the United States and China and its causes
The typical stagflation period in the United States is the 1970s, during which the U.S. economic growth slowed down, high inflation and high unemployment coexisted, resulting in the failure of the Phillips curve. The stagflation period in the United States is caused by the resonance of “domestic troubles and foreign aggression”. In terms of internal worries, after the war, China’s demand decreased and the endogenous economic growth power was insufficient. At the same time, the United States adopted an expansionary policy in response to the economic downturn, artificially stimulated total demand and pushed up prices; In terms of foreign aggression, the rapid rise of industries in Germany and Japan after the war has greatly threatened the leading advantage of the United States in China’s industry and export trade.
China’s Quasi stagflation cycle occurred between 2007-2008 and 2010-2011. The first economic downturn was caused by the global financial crisis triggered by the U.S. subprime mortgage crisis, and the upward inflation was caused by lard resonance. The second economic downturn is mainly to curb the excessive growth of real estate. The state has carried out strict macro-control of real estate for three consecutive times. Inflation is rising. On the one hand, the supply of pork caused by blue ear disease and foot-and-mouth disease is in short supply. On the other hand, stimulated by the “four trillion”, a large amount of funds flow into the real estate field, resulting in the rapid rise of house prices.
The global economic development cycle is driven by the technological revolution, but the technological revolution also has its own periodicity. At the end of the technological revolution, its marginal contribution to the economy weakens. If the global cake cannot continue to grow, it can only be adjusted by segmentation, which may be the deep reason for stagflation.
China’s economy is currently experiencing structural stagflation
From the macroeconomic environment, the current stagflation is structural. There are no signs of stagflation in the field of people’s livelihood, but there are signs of stagflation in the field of production. People’s livelihood focuses on the performance of CPI. Although CPI has increased recently, the absolute level is still low, below 4%, for 20 months. Given that the number of pigs on hand and sold is still at a high level, and the price rise of mass consumer goods has a relatively limited pulling effect on CPI, we believe that the risk of short-term CPI “inflation” is relatively controllable, but we still need to pay attention to the month on month change trend. In terms of PPI, driven by the continuous rise of energy and chemical prices, PPI has broken through double-digit growth for many consecutive months, while the continuous rise of raw material prices can be explained by the dislocation of supply and demand.
Judgment of future inflation pressure
We believe that the conduction of PPI to CPI depends on the elasticity of goods. The transmission path is “PPI means of production → PPI means of living → CPI consumer goods”. If the elasticity is small, the transmission will be relatively smooth; If the elasticity is large, the conduction will be relatively blocked, which is generally seen in small and medium-sized manufacturing enterprises.
According to our prediction model, PPI is expected to fall in the short term, which has been verified in the data in November, while CPI may further rise, and the scissors difference between PPI and CPI will narrow from the high point.
From the recent price trend of raw materials, it can be found that the prices of most means of production have peaked and fallen, and the PPI inflection point has been preliminarily confirmed. In addition, if the Omicron virus presents the light virus symptoms of “influenza”, it will have little impact on the overall global economic recovery process, and the contradiction between supply and demand of bulk commodities is expected to be further alleviated.
At the same time, the future price rise trend of CPI is also relatively certain. From historical observation, a complete pig cycle is about 3 years, half of which is the price rise cycle and half is the price decline cycle. The reason is that it takes about 12-18 months for pigs to be added to the market, and during this period, the price will continue to rise due to insufficient supply. Subsequently, the supply of pork increased and the price increase slowed down. When supply exceeded demand, the pig price entered a downward cycle. The current round of pig cycle began in June 2018. According to the calculation of pig cycle, the bottom of pig price may rebound in the second quarter of next year. However, if the continuous loss of the industry further increases the de capacity, the inflection point of pig price may also come ahead of schedule.
Pringle cycle model and empirical performance of large categories of assets
The Pringle cycle model with credit cycle considers the regulatory function of the government. It divides the economic cycle into six stages, which is stronger than Merrill Lynch clock model. According to the model, it is wise to invest in commodities or cash in stagflation.
Looking back at the performance of asset categories during China’s stagflation period (from the end of June 2007 to the end of June 2008 and from the end of December 2010 to the end of September 2011), the first paragraph: commodities > cash > bonds > stocks; The second paragraph: cash > bonds > commodities > stocks. It basically conforms to the conclusion of Pringle cycle model, but any model has its limitations. Investors should size up the situation and adjust their investment strategies according to the changes of the market.
Risk tips:
CPI rose above expectations, monetary policy exceeded expectations, and policy intervention exceeded expectations.
(Xiangcai securities)
