The CPI in July was 2.7%, 0.2 percentage points higher than in June, and rebounded for two consecutive months. Looking at the split, the warping was 2.9%, and the new price increase factor was -0.2%. The flood disaster in the south was the main reason for the year-on-year increase in CPI.

In July, the CPI rose 0.6% month-on-month, then became positive again after 4 consecutive months of negative values, 0.3% higher than the average in July of the previous three years. The CPI food category rose 2.8% month-on-month, an increase of 2.6 percentage points over the previous month, affecting the CPI increase by about 0.6% month-on-month. Prices of non-food items remained flat in July, which means that the month-on-month increase in CPI in July was all contributed by food items.

In the food category, pork prices rose the most month-on-month to 10.3%, driving CPI up 0.46% month-on-month and contributing 76.7% month-on-month. Demand for pork consumption continues to improve due to the recovery in overseas restaurants, while the floods in the south have made it more difficult to transfer pigs. The recovery in demand compounded supply pressure. Pork prices have been rising for two months in a row, and the increase is expanding. The floods also boosted the price of fresh vegetables. In July, the CPI fresh vegetables category rose 6.3% month-on-month, up from the average of 2.8% in July of the previous three years.

In July, the CPI food, tobacco, and alcohol category was 10.2% year on year, which affected the CPI increase by 3.1 percentage points year on year. The pork market rebounded from 81.6% year on year to 85.7%, ending a four-month continuous downward trend. Pork led to a 2.32 percent year-on-year increase in CPI in July, with a contribution rate of 85.9%. It continues to be the core factor supporting CPI. In comparison, fruit had the biggest year-on-year decline, reaching -27.7%.

The seven major categories other than food, tobacco, and alcohol were -0.5% compared to July, significantly lower than -0.2% in June. From this perspective, it can also be seen that the year-on-year recovery in CPI in July was mainly due to food, tobacco, and alcohol, and the overall price reduction pressure for non-food, tobacco, and alcohol was under pressure.

Core CPI continued to be sluggish year on year in July. Compared with the year-on-year recovery in overall CPI in July, it is worth paying more attention to. The core CPI in July was 0% month-on-month and fell to 0.5% year-on-year. This is a new low since statistics were available in January 2013, and the second lowest was 0.9% in June of this year. Core CPI continued to decline year over year, reflecting the fact that current production has returned to before the pandemic, but terminal demand is still recovering and oversupply is in demand.

PPI in July was 0.4% month-on-month, up from -3.0% to -2.4% yoy. As before, PPI fluctuations were mainly contributed by production materials. In July, production data was 0.5% and -3.5% month-on-month and -3.5% year-on-year, respectively, while previous values were 0.5% and -4.2%, respectively.

Industrial products that have increased in price are mainly concentrated upstream. This can be seen from the following two points:

First, looking at the industrial chain, the industries with the largest month-on-month increase in PPI in July were mainly concentrated in the three industrial chains of oil and gas, ferrous metals, and non-ferrous metals.

Second, in July, the purchase price of industrial producers (PPIRM) rose 0.9% month-on-month, a new high since November 2017. This indicator counts the prices of raw materials purchased by industrial enterprises, which are all upstream and midstream.

There is no obvious increase in the price of industrial products related to daily life. PPI living data in July was 0.1% month-on-month, the same as in June. Looking at each category, the PPI for clothing and general daily necessities in July was -0.3% and -0.2%, respectively, lower than -0.1% and 0.0% month-on-month in June. PPI for durable goods ended nine consecutive months of negative value month-on-month, rebounded to 0% in July, and is still weak. The PPI food category was 0.6% month-on-month in July, up from 0.3% in June. We think it also has something to do with the floods.

Prices in the middle and upper reaches are rising while prices in the downstream are weak. This kind of differentiation stems from economic recovery after the epidemic, mainly driven by investment. In comparison, the recovery in consumption is much slower.

GDP in the second quarter increased by 3.2% year on year. Compared with the growth rate in the first quarter, the growth rate rebounded by 10 percentage points. According to the expenditure method, total capital formation contributed 6.47 percentage points of this. Total capital formation in the second quarter contributed 5.01% year-on-year to the current quarter's GDP, a new high since statistics were available in 2015. However, final consumption expenditure dragged down the current quarter's GDP year on year. Although there was an improvement compared to the first quarter, it still dragged down 2.35% in the second quarter.

The division between the two means that in the economic recovery driven by investment, the price of middle and upstream industrial products has increased, and the momentum for transmission to downstream consumer goods is insufficient. PPI bottomed out and rebounded year on year, putting limited pressure on CPI year over year.

From March to May of this year, CPI experienced a round of rapid decline over the same period last year. In June and July, there was a slight recovery for 2 consecutive months. Looking back, we believe that CPI will once again enter a downward channel year over year.

First, the CPI warp will clearly weaken starting in August. The CPI for July was 2.9%, 2.2% and 1.3% for August and September, respectively, and fell further to 0.4%, 0%, and 0% for each month of the fourth quarter.

Second, the impact of flooding in the south is gradually receding. Floods were the main disruptive factor for the slight year-on-year recovery in CPI in June-July. As the flood peak passed, its impact on vegetable prices gradually weakened. Historical experience shows that in years of floods, vegetable prices will mostly return to normal within 1-3 months after being impacted and experienced a more than seasonal recovery. As a result, there is still some pressure to reduce vegetable prices after the floods are over.

Third, there is limited room for pork prices to continue to rise. Pig storage at the end of the second quarter was -2.2% year-on-year, a sharp improvement from -28.5% at the end of the third quarter of 2019. The correction is likely to be corrected in the third quarter of this year. The supply of pigs improved. After two consecutive months of price increases in June and July, it is unlikely that pork prices will continue to rise sharply in the future.

The average retail price of pork in 36 cities under the high-frequency index has basically fluctuated slightly since August, around 31.5 yuan/kg, which is the same as in mid-late July.

Fourthly, it is certain that terminal consumption will continue to recover, but when expectations about the economy and employment are not optimistic, it is likely that the recovery will continue slowly, and the impact of terminal demand on CPI will also be dragged down.