Although the inflation growth rate in December 2021 was lower than expected, looking back on 2021, inflation may be one of the biggest "risks". Just as in early 2020, the market did not expect the rapid recovery of the economy after the epidemic, the progress of inflation, especially PPI, in 2021 may also be beyond the expectations of most people. On the one hand, the supply side factors and their impact are underestimated, on the other hand, the relationship between inflation and policy may also need to be re examined. This may also become an important clue for us to observe inflation and policy development in 2022.
The policy of ensuring supply and price stability continues to play a role, and the commencement of the project may not be significantly improved in December 2021. The year-on-year data of PPI and CPI released in December were both lower than market expectations. From both sides of supply and demand, PPI is mainly affected by the policy of maintaining supply and stabilizing price at the supply side. In terms of CPI, in addition to the increase in the supply of vegetables and pork, the weak demand under the repeated epidemic situation is still an important drag. Specifically, there are three major drag factors on the change (- 1.2%) of PPI month on month. The prices of coal related industries continue to decline significantly month on month under the influence of guaranteed supply policy; Affected by the off-season and weak real estate construction, the prices of black and non-metallic products (mainly building materials) also led the decline. In addition, the drag of the decline in oil prices in December also began to appear (Figure 1). However, as the price of black commodities has stabilized and the oil price has rebounded significantly, we expect the PPI to improve significantly month on month in January. CPI also changed from positive to negative (- 0.3%) month on month. Food, transportation and communication related prices became the biggest drag. The former was related to the improvement of supply, and the latter was not only affected by oil prices, but also the impact of repeated epidemic on travel was an important demand side factor. We expect that in January, affected by the Spring Festival and oil prices, food and transportation prices will improve significantly month on month. However, pig prices, an important component of CPI, may hit the bottom again after the Spring Festival (Figures 2 and 3).
Looking back on the inflation "surprise" in 2021, we can start from three aspects:
Due to the superposition of long-term and short-term supply factors, PPI is facing structural and cyclical pressure. When it comes to the rise of PPI in 2021, supply is an inseparable factor. Even in the second half of the year when the power of domestic demand slowed significantly, PPI reached a new high year-on-year and month on month. The intertwined long-term, short-term, economic and policy factors on the supply side are important factors driving up prices: in the medium and long term, insufficient commodity investment is an important background and cyclical factor; In the short term, the epidemic has caused global supply chain disorder, and the "too big step" of low-carbon and energy transformation policies may play a more critical role in impacting supply (Figure 4).
Inflation under supply constraints "widens" the currency and "tightens" the finance? According to the traditional logic, high inflation usually requires tight monetary policy, which will also lead to upward interest rates. However, in 2021, when PPI reached record highs year-on-year, the central bank comprehensively reduced the reserve requirement in July and December respectively, and reduced the interest rates of refinancing and LPR. From a posteriori point of view, there are two main reasons. On the one hand, the poor transmission of PPI to CPI and the high exchange rate have caused great pressure on the operation of midstream and downstream enterprises. On the other hand, due to the stricter supervision of real estate, education, Internet and other industries, the pressure on stabilizing employment is really large. Structural and supply side factors are the main contradiction of inflation, but it is also a problem that monetary policy can not effectively solve. The proactive fiscal policy in 2021 was less than expected, especially in infrastructure. There are many factors behind this. For example, the governance of local implicit debt has been tightened, but the insufficient supply of raw materials and commodities and high prices may also be important constraints.
Under supply constraints and energy transformation, monetary policy has changed from subtraction to addition. In the past, it was generally believed that the main function of monetary policy was to regulate demand, such as tightening policy, reducing demand and controlling inflation when the economy was hot. However, under the special background of 2021, if there is a tight monetary policy, it may further aggravate the reduction of traditional energy and commodity supply, thus pushing up inflation. The central bank provides support from the supply side through the introduction of structural tools such as carbon emission reduction support tools and clean and efficient utilization of coal refinancing, so as to achieve the goal of stabilizing inflation and economy.
Looking forward to the future, what will happen to the analysis of the above three aspects in 2022?
First of all, from the supply side factors of PPI, in terms of short-term factors, the tension of the global supply chain may have peaked, and the low-carbon and energy transformation policies will also be corrected and marginal easing. The year-on-year decline of PPI is a high probability event. However, insufficient investment in commodities will lead to a significantly higher price center than before the epidemic (to stimulate investment or force demand transformation); Supply lacks elasticity, and commodity prices will be more sensitive to inventory data.
PPI growth peaked and fell, and some commodities and raw materials began to accumulate, which may mean that the important cost factors restricting financial development in 2021 are receding. The development of infrastructure may bring the economy into a benign "passive destocking" (more obvious recovery in demand), and the impact of PPI slowdown on the profit growth of industrial enterprises will be partially offset. But this also means that the real estate will not be significantly relaxed, otherwise the upstream supply bottleneck will reappear, resulting in the recurrence of PPI rising pressure.
After PPI peaked and fell, monetary policy will be more diversified. PPI pressure decreased and CPI rose moderately, which also means that there is more room for monetary policy. In addition to continuing to rely on structural tools, policy tools will also be more diversified: on the one hand, the constraints and concerns of using tools such as comprehensive reserve requirement reduction and interest rate reduction will decrease; On the other hand, the fear of imported inflation will decline, and the tolerance of exchange rate depreciation will also rise sharply.
Risk tip: the epidemic spread exceeded expectations, and China's foreign policies exceeded expectations
