How Have Global Factors Changed The Inflation Dynamics Of China

This paper evaluates how global factors have affected the inflation dynamics of China since 1996 with analysis tools as time serial regression and VAR model. We use standard Phillips curve with global factors added to analyze how these global factors affected Chinese PPI. We find that OECD output gap, import price index and oil price have substantial explanatory power on Chinese PPI, and the power holds even after the RMB exchange rate reform in 2005. Moreover, as the global economy has experienced a rather fierce fluctuation since 2005, influence of global factors have become greater and even render domestic factors unsubstantial. We then confirm that along with the globalization process, the sensitivity of Chinese PPI to domestic output gap is declining and to import prices is increasing. After that, we prove that Chinese PPI could Granger explain Chinese CoreCPI and calculated their pass-through coefficient. The pass-through of PPI to CoreCPI shows that global factors can also affect CoreCPI through this chain.As PPI and CoreCPI are the most important inflation indicators. The influence of global factors on these two indicators shows that Chinese inflation has become out of the control of domestic output gap. Give that domestic monetary or fiscal policies has to take effect through their impact on domestic output gap, this means there has to be a greater change of output gap to gain the same impact on inflation. In other words, the slope of Chinese Phillips curve has become flatter. This paper also introduces the case of Chinese economic policies and inflation management from 2005 to 2010, the case shows how domestic policies could lose power with the restriction of global factors and how much has to be paid in a n over-contract policy environment. This inspires us to review the traditional disinflation methods. When it?s hard to control the inflation caused by global factors with domestic demand management policy, we should then consider ease its impact on people?s everyday life. Issuing coupons or subsiding foods are ways of such.As an important base of this paper, we also calculated the weight of Chinese PPI and CPI, together with the estimation of Chinese Core CPI as well as the HP filter estimation of Chinese output gap and inflation expectation.