Research On Building A New Inflation Measure Index Which Includes Asset Price

In general, one of the main objectives of monetary policy is to maintain the stability of the general price level. In other words, inflation is to be controlled within the acceptable range. However, in China, traditional Indices currently used to measure the level of inflation (such as the CPI, PPI, the RPI, GDP deflator index, etc.) are only including the price of entities like goods and services in the real economy. They don’t include any assets which occupy a large proportion of the market share. And most of the traditional measure Indices are just a deferred review of past price level, they can’t contain as much as information about the social price movement in the future.With the development of modern capital markets and financial liberalization, the fluctuation of asset price has been exerting more and more far-reaching impact on the economy. Since the twentieth century, both developed and developing countries, are commonly encountered the financial crisis that asset prices bubble burst shortly after the expansion of the price.The sharp fluctuations in asset prices will not only jeopardize a country’s financial stability as well as the sustained and healthy economic development, but also seriously affect the trend of the overall price level. As we know, monetary authorities’ main objective is maintaining price stability. If they continue to use CPI as the key measurement tool, it will surly cause in question and disputing in the social.Building a reasonable and scientific index, which can better reflect the economy development, has become the focus of the theoretical fields. Since Alchian and Klein published the paper named "On a Correct Measure of Inflation" in1973, the discussion of this idea had caused widespread controversy in theory and practice fields. Should central bank respond to asset price volatility? How to respond? Whether asset prices should be included in the inflation measure system? How can we include it into the original measure system? The answer to all those problems will lay a crucial impact on the central bank and influence their attitude toward asset price volatility and the formulation of monetary policy.In this paper, the relationship between assets price and inflation will be analyzed, and we will use VAR vector auto-regression analysis tool to give a more accurate analysis. With this tool, empirical analysis is done to typical sample of assets (stocks and real estate) from1998to2010. We try to build a new inflation index which including not only goods and service but also asset price, and we try to prove that the new index will play a better indicative role and a better guide for economic operation. In this way, we hope to provide a reference method for above problems. Due to limitation on research level and subjective factors in empirical analysis, the new index proposed in this paper can not replace the original measure Indices so far, but it can be used as a reference for the Central Bank.