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The Relationship between Commodity and Consumer Prices in Mainland China and Hong Kong

Author

Listed:
  • Joanne Cutler

    (Research Department, Hong Kong Monetary Authority)

  • Carrie Chan

    (Research Department, Hong Kong Monetary Authority)

  • Unias Li

    (Research Department, Hong Kong Monetary Authority)

Abstract

It is often argued that changes in commodity prices can provide a timely signal of future movements in CPI inflation because they are a sensitive leading indicator of global demand conditions. The sharp increase in commodity prices since mid-2003 has raised concerns about whether this is a precursor to higher consumer price inflation in regional economies. Our empirical results suggest that changes in non-fuel commodity prices have significant predictive power for headline CPI inflation for Mainland China and Hong Kong, while changes in energy prices are not significant. The results are the opposite for the US. For Hong Kong, a 1% increase in non-fuel commodity prices is associated with an increase of 0.5 percentage points in headline CPI inflation after two years. This may reflect a correlation between Hong Kong housing prices (and the rental component of the CPI) and global growth. If rents are excluded, the estimate falls by one-fifth, to 0.4 percentage points. For Mainland China, the relationship between changes in commodity and consumer prices is unstable over the past two decades, reflecting structural changes in the economy and the difficulty in controlling for changes in monetary conditions over the period. Shortening the sample period to post-1997, a 1% rise in non-fuel commodity prices is associated with a 0.4 to 0.5 percentage-point-increase in future CPI inflation. These estimates are larger relatively to those found in other studies on developed economies, which could be due to several factors, including openness, a relatively large share of food prices in the CPI, and, for the Mainland, the size and commodity intensity of its manufacturing sector.

Suggested Citation

  • Joanne Cutler & Carrie Chan & Unias Li, 2005. "The Relationship between Commodity and Consumer Prices in Mainland China and Hong Kong," Working Papers 0508, Hong Kong Monetary Authority.
    • Handle: RePEc:hkg:wpaper:0508
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    File URL: http://www.info.gov.hk/hkma/eng/research/RM08-2005.pdf
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    Cited by:

    1. Jiang, Jiadan & Kim, David, 2013. "Exchange rate pass-through to inflation in China," Economic Modelling, Elsevier, vol. 33(C), pages 900-912.
    2. Álvarez Corrales, Cristian & Esquivel Monge, Manfred, 2018. "Asimetrías en el traspaso de precios de materias primas en Costa Rica, ¿influye el nivel de competencia?," Revista de Ciencias Económicas, Instituto de Investigaciones en Ciencias Económicas, Universidad de Costa Rica, vol. 36(1), December.
    3. Yusuf V. Topuz & Hassan Yazdifar & Sunil Sahadev, 2018. "The relation between the producer and consumer price indices: a two-country study," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 17(3), pages 122-130, June.
    4. Andrew Filardo & Marco Jacopo Lombardi, 2014. "Has Asian emerging market monetary policy been too procyclical when responding to swings in commodity prices?," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 129-153, Bank for International Settlements.
    5. Moayad Al Rasasi & Goblan Algahtani & Abdulrahman Alqahtani, 2017. "The Effects of Global Commodity Prices on Domestic Prices in Saudi Arabia," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 590-594.

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