Divisia Monetary Index, Energy Price And China’s Core Inflation

In recent years, China has been faced with the problem of inflation. The question that whether ups and downs of the consumer price index could represent the true level of inflation triggered a large number of thinking. At this point, the appearance of CPI without food and energy provided a solution for this issue, which released by China’s National Bureau of Statistics since 2013.Firstly, we introduces the related theories of core inflation and the existing methods of measuring core inflation. Then we make attempts to measure the core inflation of China. Secondly, we modeled China’s core inflation based on the extended Phillips curve, trying to analyze the effect of seven variables such as economic growth, monetary aggregates, energy prices, interest rates, labor costs, exchange rate and inflation inertia on core inflation. In terms of monetary aggregates index, this paper build China’s Divisia monetary index, because the simple sum of M2 can’t reflect the monetary assets’ liquidity difference effectively. Thirdly, this paper studies empirically the core inflation mechanism using General to Specific Method given on the controversy on inflation model. We research the effects of both short-term and long-term factors in the formation of core inflation between January 2000 and November 2014.The empirical results show the stable positive correlation in the long-term between inflation and Divisia monetary aggregates, so inflation is generally believed to be a monetary phenomenon. The results also show that the core inflation model is much more stable than the headline inflation model. Economic growth, energy prices and interest rates have a significant positive effect on core inflation in a long time. Exchange rate affects the level of inflation significantly both in the short run and long run. In addition, due to the path from labor price rising to inflation is blocked, labor price levels are negatively related with the core inflation in the long term.Combined with the result of empirical study, this paper puts forward policy Suggestions in the following aspects: guiding the reasonable expectations of inflation using the core inflation; Introducing Divisia monetary aggregates to improve the money supply mechanism; Adjusting the demand structure; Improving labor productivity and technical level.