As the global economy navigates its recovery journey from the impacts of the pandemic, analysts and investors are keenly observing the dynamics of inflation, particularly the relationship between production prices (PPI) and consumer prices (CPI). The so-called "inflation scissors" phenomenon describes the widening or narrowing gap between these two indicatorsWith inflation experiencing unprecedented shifts, the future outlook indicates a narrowing of this gap, which could herald significant changes in market behaviors and capital investments.

A crucial transitional period appears to be upon us, as some analysts suggest that while the "policy bottom" may have been reached, the corresponding "economic bottom" has yet to crystallizeThis temporal lag poses a challenge for stock markets that typically thrive on clear economic signals

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Once a definitive economic recovery is observed, a trend upward in stock prices may begin, benefiting sectors such as consumer goods, which are often closely tied to broader consumption patterns.

The ongoing pandemic has radically affected inflation dynamicsThe expansion of the inflation scissors since early 2020 has significantly influenced various asset classes within the capital marketsFor instance, as of November last year, the PPI posted a year-on-year increase of 12.9%, albeit a decrease of 0.6 percentage points from the previous month, while the CPI rose by 2.3%, reflecting an uptick of 0.8 percentage pointsThis resulted in an inflation scissors reading of 10.6%, suggesting a narrowing gap for the first time since the pandemic began.

Analyzing the shifts in inflation dynamics, it's essential to consider underlying factors such as demand weakening and adjustments in supply chain policies, particularly China's dual carbon initiative

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Major commodities such as steel and coal, which are critical to China's economy, have witnessed a significant drop in prices, leading to predictions of a rapid decline in PPI for 2022, consequently tapering the inflation scissors.

Historically, during different economic cycles, fluctuations in commodity prices have been more pronounced compared to those in consumer goods, often resulting in greater volatility in PPIThis inherent instability stems from the speculative nature of many upstream commodities, which respond sensitively to changes in economic cyclesThe interconnection between supply constraints and demand also plays a pivotal role in determining price trends.

Before the pandemic, the inflation scissors expanded rapidly, reaching a staggering 12% by October 2021—the highest since the inception of PPI data

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During this time, noteworthy parallels can be drawn with other periods characterized by substantial shifts in PPI and CPIFor example, post-2020, CPI changes remained relatively muted, dipping from 3.3% to 1.5%, while PPI surged from -3.1% to 13.5%. The driving force behind the widening inflation scissors was unmistakably the rapid escalation in PPI, emphasizing the unique economic pressures at play.

The expansion of the inflation scissors can be demarcated into distinct stagesThe first spurt occurred between the second and fourth quarters of 2020, coinciding with China's swift economic recovery amid expansive global policies initiated in response to the pandemicDuring this period, both bond yields and the Chinese yuan appreciated, leading to a general uplift in the stock marketThe second phase stretched from the onset of 2021 through October, during which the inflation scissors widened dramatically—a function of returning policies to a degree of normalcy alongside persistent pandemic challenges that undermined economic recovery

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This scenario culminated in strife within the real estate market, intensifying downward economic pressure.

In light of anticipated inflation developments for 2022, projections suggest noticeable structural improvementsAnalysts predict that PPI will markedly retreat while CPI will experience a slight uptick, potentially shrinking the inflation scissors to around 1.6% by year's endThe forecast relies on a tripartite rationale: a high baseline for PPI, the downward trend in primary commodities, and cyclical rebounds in certain food prices.

The examination of previous episodes of the inflation scissors' contraction reveals a fluctuating landscape influenced by infrastructural and economic variablesThe period from February 2017 to the close of 2017 exhibited strong demand across sectors, coinciding with a stable PPI and narrowing inflation scissors

Importantly, this context fostered positive conditions for consumer-facing companies, as decreasing costs enhanced profit margins amidst stable demand.

Conversely, the year 2018 was characterized by demand weakness against a backdrop of deleveraging and trade tensions between China and the U.S., which significantly pressured commodity prices and prompted rapid contraction of the inflation scissorsBy early 2019, sentiments began shifting with easing policies, providing a potential revival for the economy, albeit still within the confines of a contracting inflation scissors environment.

Given the evolving landscape, the factors motivating the anticipated contraction of the inflation scissors in 2022 deserve deeper investigationInitial expectations highlight that the prevailing economic downturn may not resolve swiftly; while policies aimed at stabilization have been addressed, they require time to enact meaningful change, with many reformative measures waiting for execution post the “two sessions” political assembly

Furthermore, speculative pressures within the real estate sector pose an ongoing liquidity risk that impacts consumer confidence and spending capacity.

Thus, as we delve deeper into 2022, the re-emergence of a clear economic bottom will likely manifest post-second quarter, mirrored by enhanced consumer demand and revitalized economic momentum reminiscent of prior recovery periodsWith risk factors gradually lifting, lending growth may stabilize, providing a forum for renewed investor confidence.

In conclusion, as the inflation scissors narrow, historical patterns suggest that the latter stages will yield fruitful outcomes for the consumer sector, providing a conducive environment for performance gains as economic fundamentals strengthenThis nuanced interplay between policy adjustments, market sentiment, and global economic conditions will dictate the trajectory ahead, transforming challenges into opportunities within capital markets.