Lecture 7: Inflation in ChinaTrendsExplanationsForecastsMacroeconomics for Business1InflationInflation measures in ChinaGeneral Consumer Price Index (GCPI)General Retail Price Index (GRPI)Implicit GDP Deflator (GDPD)2InflationChinas comparative inflation performance3InflationInflation in China 1979-20024InflationConsumer price vs GDP deflator5InflationNeoclassical explanations6InflationNarrow money stock and inflation (1981-2002)7InflationBroad money stock and inflation (1981-2002)8InflationThe broad money multiplier and cash growth (1991-2002)9InflationKeynesian explanations10InflationExternal pressures in generalChinese and world inflation rates, 1978-9911InflationExternal cost pressures: world commodity price inflation and Chinese inflation (1986-2002)12InflationDomestic cost pressures: food prices (1994-2002)13InflationDomestic cost pressures: wagesWage rate increases and consumer price inflation, 1986-9914InflationDomestic demand pressuresEconomic growth vs inflation, 1979-99 15InflationConclusionsThe key factors affecting inflation in China appear to be;External costs influence long-run (and to a certain extent short-run) inflation trendsFood prices could explain the extent to which domestic price inflation (particularly domestic consumer price inflation) deviates from international trends.Domestic demand pressures related to levels of overall economic activity (the changes in the economic growth rate), but only at certain juncturesGovernment intervention may depress the official inflation rate a certain junctures16InflationCurrent inflation trends: Jan. 2000 March 200417InflationChinese inflation and primary commodity price inflation Jan 1995- Mar 2004)18InflationChina vs East Asian competitors (Jan 2000 Mar 2004)19InflationForecastsInflation will continue to rise in the present year due to world market price pressures and some domestic demand pressures. However, the overvalued exchange rate will limit the price increases.What happens in 2005 will depend on a possible devaluation/revaluation of the exchange rate and the general state of the economy20Inflation