By Wang Wei & Wang Likun

Research Report Vol.20 No.6, 2018

In recent years, China’s economy has been transitioning from a phase of rapid growth to a stage of high-quality development, and the economic structure undergoing profound changes. With the development of the new economy and emergence of new consumption concepts, consumer preferences and choice have gradually changed, and the operating rules and influencing factors of consumer price index (CPI) will see changes accordingly. Since the beginning of 2018, China has faced growing internal and external pressures; especially, the escalation of China-US trade frictions has added uncertainty to China’s economy. Against this backdrop, we should pay more attention to price conditions at present and for years to come, and strive to create a loose price environment to stabilize expectations, support economic restructuring, and deal with internal and external impacts.

I. China’s CPI Growth Remain Generally Stable in 2018

In the first three quarters of 2018, China’s CPI continued its steady trend in recent years. It grew 2.1% year on year, higher than 1.5% over the same period last year. Still, the CPI growth rate was kept below the reasonable level of 3% in all months.

1. CPI growth showed a U-shaped trend, diverging from core CPI in the third quarter

From January to September 2018, China’s CPI growth showed a U-shaped trend year on year. Because of the Spring Festival shopping spree, the CPI rose 2.9% year on year in February, up from 1.5% for January, the highest since December 2013, and then it gradually declined. From June, however, it started to go up again, and rebounded to 2.5% in September (see Figure 1).

Data show that the trends of CPI and core CPI (food and energy excluded) diverged in the third quarter. Although the CPI year-on-year growth expanded, core CPI growth showed an obviously downward trend after it hit 2.5% in February, the highest on record (since January 2013). By September, it had dropped to 1.7%, a level considered quite stable (see Figure 2). This indicates that recent CPI rebound has been mostly driven by the hikes in volatile food and energy prices, and is not sustainable.

2. Food, housing and healthcare are the main drivers of CPI growth

From January to September 2018, the prices of food, tobacco and wine went up 1.6%, and the prices of housing and healthcare rose 2.4% and 5%, accounting for 23.6%, 22.9% and 18.1% of the CPI increase, respectively. They were the main factors driving up the CPI. Over the same period, the prices of education, culture and entertainment picked up 2.2%, transport and communications 1.7%, clothing 1.2%, and daily necessities and services 1.6%, contributing little to the CPI increase.

Among food, tobacco and wine, the prices of fresh vegetables and eggs saw a dramatic increase year on year. From January to September, they shot up 7.7% and 14.6% year on year, driving up the CPI growth by 0.18 and 0.07 percentage point, respectively. In contrast, meal prices fell 5.3% year on year (pork prices down 10.3%), dragging down the CPI growth by 0.24 percentage point (pork 0.26%). From the third quarter, however, the prices of fresh vegetables, pork, eggs and fruits all climbed substantially, resulting in a 2.4% month-on-month CPI increase for food items in both August and September, close to the increase before the 2018 Spring Festival.

Housing prices has been on the rise since 2015, making outstanding contribution to the relatively stable CPI growth in recent years. In 2016, 2017 and the first three quarters of 2018, housing items drove up the CPI growth by 0.32, 0.52 and 0.48 percentage point, respectively, while their proportion in CPI increase surged from 15.8% in 2016 to 32.5% in 2017, and then fell to 22.9% in the first quarters of 2018. Among the housing items, rents and utilities prices both went up month on month in the third quarter of 2018, posting a quarterly increase of 1.3% and 1.4%, the highest since 2013.

From January to September 2018, healthcare prices rose 5% year on year. By month, however, the year-on-year growth has been on the decline since the third quarter of 2017, and it slipped to 2.7% in September 2018. Since the beginning of 2018, the growth of medical service prices has decelerated rapidly, but the increase in traditional Chinese medicine and Western medicine prices has edged upward, with a year-on-year increase of 6.1% and 5.3% in September.

3. The contribution of the CPI tail-raising factor declined, while that of the new price-raising factor grew rapidly

The tail-raising factor, or the influence of price increases last year on the year-on-year figures this year, contributed 1.1 percentage points to the 2.1% year-on-year CPI growth in the first three quarters of 2018, accounting for 52.4%. By contrast, due to the hike in food prices, drug prices and rents this summer, the new price-raising factor, which refers to the influence of price increases this year on CPI growth, saw its share surge from 21.4% in June to 83% in September.

II. The Main Factors Influencing CPI Variations in 2018

In 2018, the abnormal weather conditions, African swine fever outbreaks, and policy changes in the public service sector and other fields that concern people’s livelihood together pushed up the CPI, while the slowdown in consumption growth and the tight money and financing due to deleveraging restrained the rise of CPI.

1. Short-term factors such as abnormal weather conditions and African swine fever outbreaks lifted food and drug prices

First, because of the high temperature in summer, frequent typhoons in the coastal areas, and other abnormal weather conditions, some fresh vegetables, fresh fruits, Chinese herbal medicines and eggs were in short supply, and their prices went up considerably, becoming the largest contributor to the CPI growth in the third quarter.

Second, the African swine fever outbreaks in some regions led to tight pork supply and rising prices. As a result, pork prices in the third quarter of 2018 rose month on month, and the year-on-year decline narrowed significantly. By September, the year-on-year decline had dropped to only 2.4%, and the downward trend having continued for 20 months is expected to end soon.

2. Policy adjustments relating to people’s livelihood and industrial development contributed to price rise of some goods and services

First, rents have risen rapidly in some regions. In the year, a number of cities introduced policies to attract young talents, resulting in a sharp increase in permanent resident applicants and a strong demand for rental housing. Some cities pressed ahead with the renovation of “urban villages” and demolishment of illegal buildings, which to a certain extent reduced the supply of rental housing, especially low-cost rental housing. In addition, in the spirit of “housing is for living in, not for speculation”, China has energetically boosted the rental housing market, and long-term lets and other new business modes developed rapidly. With the introduction of private capital, however, leasing enterprises scrambled for housing resources in some regions. These factors together drove up rent increases in 2018, especially in the graduation season of summer, bringing the cumulative rent increase in the third quarter to a five-year high.

Second, drug prices have grown quickly due to the relaxation of price control in recent years. To address drug price inversions, seven departments including the National Development and Reform Commission and the National Health and Family Planning Commission jointly issued the Circular on the Opinions on Promoting Drug Price Reform in May 2015. Accordingly the price of most drugs will no longer be determined by the government, freeing up the space for price adjustment of all kinds of drugs, especially low-cost drugs. In July 2017, the Law of the People’s Republic of China on Traditional Chinese Medicine officially came into effect. Qualified TCM institutions and medicines are entitled to the reimbursement of basic health insurance, stimulating market demand for traditional Chinese medicine. In addition, some pharmaceutical enterprises monopolized the supply of raw materials and refused to honor drug procurement contracts. For these reasons, drug prices continued the upward trend since 2015, and grew at higher rates in 2018.

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