Measurement And Forecasting Of Inflation Cycles In China

One of the objectives for social and economic development in our country is to keep the average Consumer Price Index around4%for the next whole year and to keep price level stable.Problems caused by inflation have not just drawn concerns of the public, but also brought more academic arguments on issues as inflation detection and macroeconomic policies. Controlling price rise is an essential objective of government’s policies. High inflation rate means decrease of people’s real income, market distortion, and has bad effect on market Researches on causes, transmission system and detection of inflation are significant subjects in Macroeconomics.This paper introduces a non-parameter dating algorithm and a new diffusion index, which are based on an appropriately defined Markov chains as well as the basic censoring rules that enforce alteration of peaks-troughs, and duration constrains concerning the phases and the full cycle. The algorithm can be applied to date deviation cycles, and enforce restrains to amplitude so as to avoid influence from minor fluctuations.We use the algorithm to date the inflation cycles in China based on the Consumer Price Index monthly data from1990to2012, and the whole period is divided into five cycles each showing different features from one another. The average expansion period lasts30.4months, and it is24.2months for recession period,showing dissymmetry of cycles.The steepness of expansion is0.328,while the steepness of recession is0.461, which means price rising is a little slower than dropping. Based on the results above, the paper constructs short-Leading and long-Leading Diffusion Index, Coincident Diffusion Index as well as Composite Index using indicators chosen by using Consumer Price Index as benchmark. Among them, the DIs, which in essence are expansion or recession probabilities, are constructed by applying the algorithm in Chapter2.They show that the price level will fluctuate to a small extent in the first half of2012, and the whole yeah will be staying in modest inflation. It is not expected to rise dramatically during the second half of2012. The paper also includes a model with indicators from2002to2012, which are relevant firmly to price level. It shows that costs rise, international impact, demand and monetary are main factors having significant effects on price. Demand driving has been the most influential factor since2002, and due to the developing of openness, and restrains from recourses shortage within our country,costs rise and international impact are increasingly effective to price now.Especially in the latest cycle, change of global economic environment and developed countries’ policies has actually had impact our price level.Analyzing movements of factors causing fluctuations of the price level, we find, food price is always driving the Consumer Price Index higher in our country, and as prices of some living necessities like pork are likely to rise, rising pressure still persists. Secondly, primary products’costs such as crude oil and some other raw materials have been staying high, and global excessive liquidity has been increasing, both making us under pressure of imported inflation.Thirdly, due to shortage of resources and energy as well as the pending policy of energy saving and commission reduction, production costs are not likely to drop in a short time. Additionally, the government is implementing liberal currency gradually in order to simulate domestic economy. All mean that we are staying in modest inflation period.The last but not the least, the slight turndown of domestic economy in some degree reduces the influence of demand, and it helps keep price level steady.We can conclude from the analysis that Consumer Price Index in our country will fluctuate slightly and we are staying in modest inflation in2012.To keep price level stable, it’s recommend we should control the food price continuously and avoid its rapid increase, which is firmly related to people’s living standard; secondly, we should encourage technology innovations and use resources in a more appropriate way to reduce the stress caused by excessive production costs. Thirdly, try to perfect our storage system of critical resources to handle the impact of imported inflation. Moreover, we need implement active finance policy and prudent monetary policy to sustain economic growth and price stability.The two main innovations of the paper are outlined:(1) by using nonparametric algorithm proposed by overseas academics,we date turning points of inflation cycles presented by Consumer Price Index to capture the features of inflation cycles in China.(2) we have constructed Diffusion Index,which in essence are probabilities, using the same algorithm above,which to some extent improves the traditional way of DI.