A Study On The Major Cause Of Inflation In China

The major cause of inflation is not the same every time and it depends on thespecific situation. To cope with inflation effectively, we must at first find out themain reason for inflation in the period which we are interested in. Lots of literaturehas examined the recent inflation in China and stated their own opinions on the majorcauses, and the results are discrepant. Based on the theoretical model of Philips curveand other economic theory, this article starts by analyzing the possible causes ofinflation, and then examines the mechanism that how output gap, money supply,consumption, investment, government expenditure and supply shocks would impactthe inflation rate. The majors causes are divided into two groups: demand factors andsupply factors.In the empirical analyses part of this paper, economic data from2003to2011isbeing used to calculate the quarter-on-quarter index of the possible determinants ofinflation. The results of multiple linear regression model, VAR model and Grangercausality test indicate that: in the period of this article examines, inflation is mainlycaused by supply shocks, and the rise in the price of agricultural products contributesthe most to inflation; the increase of money supply is more likely to be theconsequence of the reaction to the supply shocks by the central bank; the expansionof aggregate demand may not be the main reason of recent inflation, while it isnecessary for the supply shocks to create an inflation; the inflation in the sampleperiod shows evident feature of inertia, which indicates that the assumption ofadaptive expectation coincide with the facts.