CITIC Securities: Will the bond market face the risk of inflation in 2025?

The Zhitong Finance App learned that CITIC Securities released a research report saying that under demand-side constraints, the overall inflation trend has been weak since 2024, PPI has not corrected year on year, and CPI fluctuates at a low level year on year. Looking ahead to 2025, the momentum for price increases for industrial products may still be limited during the global economic downturn. PPI may pick up moderately, but it will be difficult to recover within the year. In terms of CPI, pig prices may peak in early 2025. Under the base effect, year-on-year readings are expected to fluctuate widely, and the center will pick up slightly. Overall, it is estimated that the 2025 inflation trend will not be enough to reverse the broad monetary trend during most periods of the year, but it is necessary to pay attention to the rapid recovery of CPI year-on-year readings under the base effect during some periods disrupting the bond market.

2024 Inflation Trend Review: Weak Demand, Low Inflation

Looking back at the inflation trend since 2024, the PPI reading fluctuated below 0, with the majority below the month-on-month ratio. Since this year, supply-side repair elasticity has been stronger than on the demand side. Real estate continues to bottom out, infrastructure investment growth has slowed, and price increases for major industrial products have been weak. CPI readings fluctuated and rebounded year-on-year, and remained below 1%. The month-on-month trend was quite divergent. Among them, pig prices entered a new cycle of price increases in the second half of the year. Since the second half of the year, the month-on-month price increase momentum for non-food items has been lower than the same period last year, and the price recovery is still being compounded by weak demand.

2025 inflation trend forecast: PPI rebounded steadily in the first half of the year, and CPI fluctuated widely year over year

Referring to the two leading indicators, the M1 year-on-year growth rate and the year-on-year growth rate of real estate sales, in an environment where investment demand is under pressure, PPI is expected to fluctuate mainly at a low level year-on-year in the first half of 2025. The year-on-year trend of CPI for non-food items is basically in sync with or slightly behind the PPI year-on-year trend. It is expected that there will be no significant upward momentum in the first half of the year; food items may fluctuate sharply year over year or under the influence of the pig price base for that year, and overall CPI may be high and low year over year.

PPI: The momentum for price increases may still be limited during the global economic downturn, and it may be difficult to recover within the year

The supply-side OPEC+ production increase plan was implemented at the beginning of the year; in an environment where Iran's supply is uncertain and long-term demand lacks support, oil prices may fluctuate widely and decline; the trend of black prices in 2025 may be more affected by the growth rate of infrastructure investment and the pace of fiscal strength. The center may be similar to this year, and the trend may go up and down; on the non-ferrous side, high inventories limit the momentum for short-term price increases, but in an environment where manufacturing prosperity rebounds, there may be long-term price support. PPI is expected to stabilize year on year in 2025 or in the first half of the year, and pick up at an accelerated pace in the second half of the year, but it is difficult to correct.

CPI: The pig cycle may peak and fall, year-on-year readings fluctuate under the base effect, and the center rebounded slightly

Referring to leading indicators such as breeding sow breeding, pig storage, and pig release, pork prices in 2025 may show a slight upward trend at the beginning of the year and then a steady decline thereafter. At the same time, it is assumed that vegetable and fruit prices will continue the seasonal trend. In terms of non-food items, the momentum for price increases during the holiday period is higher or higher in an environment where seasonal trends continue to be characteristic and consumer promotion tools are gradually being strengthened. In summary, CPI is likely to fluctuate and rise year over year in 2025.

The moderate recovery in inflation may not be enough to reverse the broad monetary trend during most periods of the year, but we need to pay attention to the impact of the base effect during some periods

PPI is expected to rise moderately year on year in 2025, but it is difficult to correct it. CPI readings fluctuate widely, and the center is slightly higher, but in most cases it remains within 1%. As far as the bond market is concerned, inflationary pressure is still light, or may not be enough to disrupt the central bank's loose monetary policy approach. However, it is worth noting that in individual months, under the influence of that year's low base, the CPI readings may show a rapid rise. The possibility of some disturbance in the bond market is not ruled out, but the overall risk of inflation may still be manageable.