PPI: The Leading Indicator Of Inflation In China At Present

To curb inflation, the central bank need to accurately grasp the leading indicators of inflation, so as to correctly grasp the future trend of economic and price foe the purpose of implementing preventive measures. Since January 2003, PPI rose significantly, because of China's rapid economic development and the rapid growth of investment. Then accompanying the rise of food prices, CPI began to increase continuously. These phenomena have been increasing inflationary pressures in China gradually. Therefore we try to study the relationship between PPI and CPI in order to identify the proposition that whether the PPI was the leading indicator of inflation in China at present. According to cost pricing theory,producing theory and industrial chain theory, the change in PPI can lead a corresponding change in CPI. So we establish distribution lag model to test the relationship between the two, using test of stationary and ARCH effects,test for cointegration and Granger causality test .The result shows that a change of PPI is caused by the change in CPI. Then we explain the reasons for this result, basing on the actual association of sub-indexes of China's PPI and CPI. The conclusion shows that Ex-Factory Price Indices of Means of Production,Ex-Factory Price Indices of Consumer Goods and Indices of Purchasing Prices of Raw Materials,Fuels and Power have been leading the change of CPI. So the general conclusion is that PPI could be seen as the leading indicator of inflation in China currently. Therefore, the PPI could be used to predict inflation by the government and Scholars.