Assessment of inflation in China and the role of international food prices

Abstract: This paper aims at describing the drivers of long-run consumer price inflation in China as well as determining the role of imported inflation through changes in international food prices. The study was conducted with an OLS-regression on a Two-Pillar Phillips curve theoretical framework. Analysis of year-on-year growth data concludes that the main drivers of CPI inflation are: output gap, house prices, real effective exchange rate and international food prices, which all have a positive effect on inflationary levels. On the other hand, excess money growth proved to have an opposite effect. Output gap proved to be the main driver, yet the role of international food prices was significant and instantaneous. Inflationary pressure from international food prices makes it hard for policy makers in China to address the situation of increasing consumer prices, refraining domestic economic growth.