Influence of Economic Factors on Fluctuation of CPI in China
The Influence of Economic Factors on the Fluctuation of the Consumer Price Index (CPI) in China
Abstract:
Accurately measuring prices and their rate of change is central to almost every economic issue. There is virtually no other issue that is so endemic to every field of economics. Consumer price index is widely used around the world to indicate the economic situation in a country. This essay is an investigation into the essential factors of CPI fluctuation in China, and the purpose is to investigate into some of the most important economic indicators which affect the fluctuation of CPI in China. The factors selected for analysis are Gross Domestic Product, Producer Price Index and Retail Price Index. The main objectives of this essay are to identify the relationship between the dominant independent variables with dependent variable (CPI) and to examine their influence on the CPI in China, thus judging the degree to which CPI is influenced by those economic factors and providing some useful domination of CPI predicting.
Methodology
The purpose of this study is to examine and compare the relation of the very economic indicators and CPI. The economic factors selected for analysis are GDP, PPI and RPI. This essay will use datum which is the first hand datum from the China Statistical Yearbook to conduct the Correlation analysis via the statistical software SPSS. The dependent variables studied are the consumer price index (hereinafter refer to CPI) in China and the set of independent variables comprised of gross domestic product (hereinafter refer to GDP), producer price index (hereinafter refer to PPI), Retail Price Index (hereinafter refer to RPI).
Introduction
Considering of this essay is very professional to the field of statistic, I will cover some necessary background information of those economic indictor (CPI, GDP, PPI and RPI) at the beginning of the main objective of this essay.
1.1 The definition of CPI
Over the years, many studies have been carried out to predict the trend of CPI. Because the methodology used to calculate the CPI has also undergone numerous revisions, different countries use various formulas for calculating their CPIs. In this section, I will introduce CPI theory in China and USA.
1.2 The definition of CPI theory in China
The Consumer Price Index（CPI）in China published by National Bureau of Statistics of China monthly is an inflationary indicator that measures the change in the cost of a fixed basket of products and services purchased by most of the households.
It reflects the degree of inflation and deflation to some extent, and therefore it is also an important indicator of macro economic analysis and decision making, monitoring and regulation of the general price level, as well as the national economic accounting. For example, it can be used to determine the cost of living adjustments and tax levels for the social security benefits. It is also an important basis for measuring the rate of inflation, inflation rate = (CPI* — CPI) / CPI x 100%
1.3The definition of CPI theory in USA
According to the official dictionary definition:
The Consumer Price Index (CPI) is a standard measure of the average change in prices over time of goods and services purchased by households and consumers and do not attempt to reflect prices faced by all buying entities in a country. Which is the most commonly used price level indicator in a nation and also the base for calculation of a country's inflation rate.
1.4 The history of CPI theory evolution
The Consumer Price Index stems from Europe. In the Mid 17th century, A British scholar called Rice Vaughan, in the article “the theory of the monetization ", took cereals, fish, cloth, cotton and vegetables as samples, and compared the prices between the year of l650 and 1352, thus authorizing the index reflecting the changes of the metallic currency exchange value. Consequently, this has been recognized as the bud of the consumer price index by the academic community .After the World War I, in order to reflect the situation of the economic development in China, the formation of Chinese CPI began ——in the late Qing dynasty.—— This is the origination of Chinese CPI. In 1994, according to the require of Price Statistics Reform, formally the state abolished the national workers costs of living price index, then started the compilation of the consumer price index and retail price index separately. In 2001, the National Bureau of Statistics phased in a set of new system, which revised the former computational method. Consequently, the compilation of the Chinese CPI system has matured.
2 Relative definitions
It is a common sense that the economic indicators can have a huge impact on CPI; therefore, knowing how to interpret and analyze them is important for the prediction of CPI. In this section, I'll cover some of the most important economic indicators which have close links with the fluctuation of CPI.
2.1 The definition of GDP
The Gross Domestic Product as an indicator of economic growth and the strength of an economy is the total market value of all final goods and services generated by the total production during a particular period. It is also an important input for investors. Furthermore, the report is only released quarterly and commands little market attention because of it's lack of timeliness.
According to the official dictionary definition, the Gross Domestic Product is calculated in the following way
GDP = C + I + G + (EX IM)
C = consumer consumption
I = private investment
G = government expense
EX = exports of goods
IM = imports of goods
2.2 The definition of Producer Price Index (PPI) (representing the indices of producing area), Retail Price Index (RPI)(representing the indices of circulation process) (CPI represents the index of consuming area)
In accordance with the process spread from the field of production and circulation to the area of consumption, the price indices can be divided into areas of production, circulation and consumer price index. To study how the production process and distribution process affect the final consumer prices I have selected the producer price index (hereinafter referred to as PPI) as the price index representing the production sector; and choose the retail price index(hereinafter referred to as RPI) as the price index representing the area in circulation field to research.
2.2.1 The definition of Producer Price Index
The Producer Price Index formerly called the wholesale price index is a family of indexes that measure the average change over time in selling prices received by domestic producers of goods and services, which is released monthly by the Bureau of Labor Statistics of China and is contrast to other measures that measure price change from the perspective of the purchaser.
2.2.2 The definition of Retail Price Index
RPI: An index of the prices of goods and services measures the average change in prices which is purchased by average households in retail shops, expressed in percentage terms relative to a base year, which is taken as 100.
3 Relationships
3.1 GDP & CPI
As to the affect CPI act on GDP, The CPI is a significant indicator which is used to be an identifiable contribution to the government expenses. And the CPI plays a role in the determination of the real GDP ; therefore, manipulation of the CPI could imply manipulation of the GDP because the CPI is used to deflate some of the nominal GDP components for the effects of inflation. CPI and GDP have an inverse relationship, so a lower CPI and its inverse effect on GDP could suggest to investors that the economy is stronger and healthier than it really is .
1. A depressed CPI is responsible for the dwindling government expenditure which includes Social Security and the returns from TIPS are linked to the level of the CPI.
2. The unpredictable quantity of inflation is an identifiable cause of the unachievable true return rate of the investor, when the real ratio of inflation is beyond the CPI .namely, the moneyman's true ratio return will not catch up their primary expectation, when the real proportion of inflation is larger than the CPI which is accounted by the government.
GDP Price Index
To investigate the relationship between CPI and GDP, we should unify the dimension of CPI and GDP. Because the CPI is the change rate of consumer price, the Statistic Bureau uses GDP Price Index to calculate the change rate of GDP. So I choose GDP price index to measure the change rate of GDP. According to the official dictionary definition, GDP Price Index is:
Released with the GDP, the GDP Price Index measures the change in the prices of goods and services that are included in GDP. The GDP Price Index is an indicator for inflation calculated by comparing the current GDP to GDP in the reference year. A high or rising GDP Price Index, like other indicators of inflation, puts pressure on the Federal Reserve to raise interest rates. These rate hikes generally strengthen the dollar, as they increase the return for many dollar denominated securities. in that it includes all products accounted for by GDP and does not include the affects of changes in import prices. Furthermore, the report is only released quarterly and commands little market attention because of it lack of timeliness.
According to the historical datum, we can finally get this line chart above, which showed us the relationship between CPI and GDP over 30 years from 1978 to 2008 in China. We can see clearly that there do exist mutual positive influences between GDP and CPI, and the latter one reacts to the former one with a time lag of 12 months. The trend of CPI in China also showed obvious cyclical characteristics.
3.2 PPI, RPI &CPI
In accordance with the process spread from the field of production and circulation to the area of consumption, the price indices can be divided into areas of production, circulation and consumer price index. To study how the production process and distribution process affect the final consumer prices I have selected the producer price index (hereinafter referred to as PPI) as the price index representing the production sector; and choose the retail price index(hereinafter referred to as RPI) as the price index representing the area in circulation field to research.
Considering of that the consumer price index (CPI) and producer price index (PPI) are interrelated but significantly different concepts . It is necessary to identify the difference between these two indices before going further of analysis of the interaction between CPI, PPI and.
3.2.1 The difference between CPI and PPI
Referring to the difference between CPI and PPI, there two major distinctions I will point out. Firstly, the CPI and PPI have measured different goods and services. The PPI focuses on the whole output of producers. This index includes the commodities brought by both producers and retail sellers. On the contrary, the target goods and services of CPI are purchased by the residents or consumers..
Secondly, the PPI does not include imports. Conversely, the CPI includes taxes and sales because these economic factors do have influence on the consumer behaviors, because they have to pay more for the goods and services.
3.2.2 The affect of the upstream index work on CPI
Relationship between the two indices may be that of causality or non causality . This section conducts China's CPI and PPI datum for the period from January 2001 to August 2008 to study how the production process and distribution process affect the final consumer prices. In this section, I will use the producer price index as the indices representing the production sector; and choose the retail price index as the price index representing the area in circulation research.
Taking into account the fluctuations of CPI since 2000 is relatively stable and the datum availability, I use the monthly year data from January 2000 to December 2008 to conduct the correlation analysis in this section.
According to the statistical software SPSS, it can come to the conclusion underneath: As can be seen form the table above, all of the correlation coefficients are positive numbers, which means that the relationships between CPI, PPI and RPI are positive. For example, if the CPI showed an upward trend, so do the PPI and RPI in the future. What is worth mentioning is that, as we can see, all of the Significance Coefficients are zero, which means that this statistic is reliable.
What's more, in accordance with the process of price spread from the field of production and circulation to the area of consumption, the figures of Correlation Coefficient experienced a downward tendency from PPI, RPI to CPI. This trend shows that PPI has a relationship with RPI which is closer than that of the relationship with CPI, which indicates that the PPI causes the change in RPI, and later on the RPI lead to the change of CPI. Namely, the influence of price index in the production area on the consumer price index is weaker than that of the price index in the circulation area. This trend has showed an obvious structural features of the industrial chain, which is in line with the transfer process of prices spread from production to distribution and finally to the consumption area.
Taking an example in our daily life here, the price of raw material will contribute to the price of commodity received by the domestic producers. When a finished product has been prepared to distribute to the market for selling to the wholesaler, the price of this commodity will affect its price in circulation area, which means the price that the wholesaler received. Afterwards, this price of the wholesaler received will influence the price of consumer gets, which share the same meaning of consumer price.
3.2.3 The affect the CPI work on PPI
As to the question how does CPI affect PPI, we can look into the study its inner mechanism in the angle of the chain of supply and people's anticipation. Generally speaking, there are mainly three ways for price spread from consumption field to production field.
Firstly, the food prices accounting for over 30% of CPI affect the structural inflation rate greatly, which makes up the most proportion in our daily consumption. The surge of food prices will stimulate the increase of salary, which lead to a rise of labor expenses for companies and businesses. Consequently, the products expenditure would augment.
Besides the increase of the food price, CPI promotes the surge of raw materials as well, such as the cost of crude oil, natural gas, copper, aluminum, and the other kinds of commodities like agricultural goods, Soya bean oil grew beyond 200% in the last 1 or 2 years, which is always the case not only in the internal exchange or international exchange. As a result, these sorts of expenditure will add to the whole cost production. The third channel that the CPI contributes to PPI is the consumer expectation. When the consumers think that the daily consumption would go upward in the future, they will ask for a relatively higher salary. Afterwards, the price of consumer goods will be pushed higher.
Based on the analysis above, we can come to the conclusion that the increasing prices of food and raw materials, as well as the possible rise of workers' salaries, will propel the upwards tendency of the producer prices of industrial products .
4 Conclusions
The general conclusions derived from this study are:
Firstly, in terms of the relationship between CPI and GDP, The CPI has an inverse effect on GDP, and it also plays a role in the determination of the GDP. In addition, a depressed CPI is responsible for lower government expenditure, which will lead to an increase of GDP. From the line chart which is conducted by the statistical software SPSS above, it showed that there do exists mutual positive relationship between CPI and GDP over 30 years from 1978 to 2008 in China. Besides, the CPI reacts to the GDP with a time lag of 12 months
Secondly, as for the correlation between the CPI, PPI and RPI, The results of Spearman Correlation Analysis showed that the influence of PPI and RPI act on CPI is in line with the theory of process spread from the field of production and circulation to the area of consumption.
According to the table2 conducted by Spearman Correlation Analysis via the statistical software SPSS, we can see clearly that the figures of Correlation Coefficient experienced a downward tendency from PPI, RPI to CPI, which indicates that PPI has a relationship with RPI which is closer than that of the relationship with CPI. Namely, the influence of price index in the production area on the consumer price index is weaker than that of the price index in the circulation area. On the other hand, consumer price index and the retail price index will react on the producer price index as well.
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