Pass-through Effects of Global Commodity Prices on China's Inflation: An Empirical Investigation

The present paper uses a two-step approach to estimate the pass-through effects of changes in international commodity prices and the RMB exchange rate on domestic consumer price inflation in China. We first estimate the pass-through effects of international commodity prices on producer prices and then estimate the pass-through effects of producer price inflation on consumer price inflation. We find that a 10-percent increase in international commodity prices would lead to China's producer prices increasing by 1.2 percent 3 months later, which in turn would increase China's domestic inflation by 0.24 percent over the same period. However, a 10-percent appreciation of the RMB exchange rate against the US dollar would help to reduce increases in producer prices by 4.4 percent over the following 3 months, which in turn would lead to a 0.89-percent decline in consumer price inflation over the same period. Our findings suggest that appreciation of the RMB in an environment of rising global commodity prices and a weak US dollar could be an effective instrument to help contain inflation in China. Copyright (c) 2008 The Authors Journal compilation (c) 2008 Institute of World Economics and Politics, Chinese Academy of Social Sciences.