The People's Bank of China (PBOC) has been continuously sending out warning signals for inflation under a stable and low consumer price index. Based on historical experiences, when the non-food consumer price index (CPI) increases for six consecutive months at a growth rate of over 1 percent, the central bank is alerted and may raise interest rates. Under such a presumption, if non-food CPI continues to climb in September, the market should pay more attention to central bank activities.
Judging from general CPI, fix-asset investment, money supply and commodity prices of large amounts, it is hard to understand PBOC's worries concerning inflation. The central bank's concerns may have come from the movement of core CPI, like its peers in other countries. The Federal Reserves, the central bank of the United States, for example, puts more attention on core CPI in addition to general CPI. The Bank of Japan usually watches the core CPI, the result of general CPI deducted by livestock and processed food, in its decision on whether to terminate a long-term zero real interest rates.
The monthly CPI indexes released by the National Bureau of Statistics (NBS) since 2003, include a non-food CPI index, which was drawn from eliminating food variables from general CPI, weighing different remaining variables and assigning a particular coefficient to each of them. The sum of the weighing coefficients is always 1. For example, non-food CPI = aX + bY + cZ, a, b and c are coefficients made of constant numbers and a + b + c =1; X, Y and Z are variables representing average prices of cigarettes, TVs or houses. Like general CPI, non-food CPI is compared month-on-month, i.e., the percentage exchange of the index of this month to that of the same month a year earlier. Non-food CPI could be seen as China's core CPI.
The full text is available in the October Issue ofChina Banking.