Codependent Cycles of Chinese Inflation

Social Sciences in China

Vol. 35, No. 4, 2014

Codependent Cycles of Chinese Inflation



Wang Shaoping and Sun Xiaotao


A test and decomposition of the codependent cycles of the consumer price index (CPI), agricultural producer price index (APPI) and M2 reveals that the sharp cyclical fluctuations in agricultural producer prices largely stem from the grain price fluctuations induced by factors such as land enclosure and the impact on APP of the abrupt changes in pork prices and other factors. Therefore, changing the current policy of grain purchasing price subsidies to one of subsidies to grain production and sales will reduce the impact of grain prices and other factors on APP and inflation. The weak cyclic codependence among APP, CPI and M2, along with the strong cyclic codependence between M2 and CPI, has given rise to a “shuttle-shaped” intersection of cyclic elements. This indicates that China’s monetary policy goal has been alternating between curbing inflation and stimulating growth. When the APP cycle is basically stable, China can implement a moderately easing monetary policy to stimulate economic growth, but this must be based on a 1.5 or so margin of increase in the codependent cycle components of M2. When APP rises sharply or is in the rising phase of cycle elements, China should emphasize APP control, and should delay the moderately easing monetary policy till the APP cycle becomes stable or is in the downlink phase.