1、sdAustralian Markets Weekly 05 November 2009 / - 1 - of 9 - 1 - ECONOMICS Pi,tis the price of commodity i in period t; Pi,bis the price of commodity i in the base period, b; Qi,bis the quantity of commodity i imported in b; b is the base period; and t is the current period. The advantage of this app
2、roach is that it uses base-period weights for comparison and therefore, the price effect can be fully accounted for when tracking the commodity import index over time. While one could also use a Paache index to construct the commodity price index (i.e., where the weights of the index could vary over
3、 time), it would be difficult to discern whether changes in the index were due to price or quantity effects. The data cover the monthly import data for China from 2003 to present. In order to compute the monthly unit prices of a commodity import, we will have to use both import volume and value data
4、. The data cover agricultural, energy, base metals, and other resource imports. The weights of these commodity categories are presented in the table below. Table 1: Weights of Commodity Categories of the Import Index Items Weights (%)Agricultural Goods 11.6Energy 42.0Base Metals 39.7Other Resources
5、6.7Sources: CEIC, ANZ Economics The commodity import index for China We present both the Lespreyres (fixed weight) index and the Paache (variable weight) index in the chart below. Two notable features are worth mentioning: First, the time series for these two indices have a similar shape, but the in
6、dex based on fixed weights always moves below the index based on moving weights. The differences are particularly large in the peak period of commodity import prices. Second, Chinas commodity import prices also follow closely with the IMFs global commodity price index but with a lag. This suggests t
7、hat China is a price follower, rather than a price setter, despite the country being a major commodity importer. 1Please also see “Modifications to the Reserve Bank of Australias Commodity Price Index” in the September 1998 issue of Reserve Bank of Australian Bulletin for a reference. China Economic
8、s and Research - A Commodity Import Price Index for China - 13 January 2010 - 3 - China - Commodity Import Price Index (2003=100)0501001502002503003504004505002003200420052006200720082009Paache IndexLespreyres IndexChina - Commodity Price Index05010015020025030035040020032004200520062007200820090501
9、00150200250China Commodity Price IndexIMF World Commodity Price Index (RHS)Sources: CEIC, ANZ Economics We further divide the aggregated commodity import price index into two sub indices: the agricultural and the hard commodity index. The time series of these indices are broadly similar. However, th
10、e hard commodity import index rises twice as fast as the agricultural commodity import index over the period 2003 to 2009. China - Commodity Import Price Index (2003=100)0501001502002503003504004502003200420052006200720082009Hard Commodity Index Agricultural IndexSources: CEIC, ANZ Economics The rel
11、ationship between Chinas PPI and the commodity import index Because of Chinas increased reliance on the primary commodity imports, one would naturally expect that there be a close relationship between Chinas producer price index and the commodity import index. We find that the relationship is indeed
12、 close. As shown in the charts below, these two indices often move closely with each other after adjusting for the scale factor. This suggests that there exists a strong pass-through effect from commodity import prices to producer prices. The relationship between commodity import prices and the non-
13、food consumer price also appears to be strong. China Economics and Research - A Commodity Import Price Index for China - 13 January 2010 - 4 - China - Commodity Import Price and PPI-60-40-20020406020052006200720082009-10-5051015Commodity Price Index, y/yPPI, y/y, RHSChina - Commodity Import Price an
14、d Non-food CPI-60-40-20020406020052006200720082009-3-2-10123Commodity Price Index, y/yNon-food CPI, y/y, RHSSources: CEIC, ANZ Economics Pass-through of global commodities prices to Chinas PPI inflation: An empirical investigation How large is the pass-through from the commodity import price index t
15、o the PPI and eventually to the CPI? We investigate this issue empirically. Following a standard framework on the relationship between import prices and exchange rate after adjusting for domestic demand factors, as illustrated by Campa and Goldberg (2005)2, we estimate the elasticity of pass-through
16、 from international commodities prices to the PPI inflation using the monthly data for the period of July 2005 to Nov 2009. The choice of the sample period coincides with a structural change of the RMB exchange rate regime occurred in July 2005, when the Chinese exchange rate was changed from a pegg
17、ed regime to a managed floating system with a reference to a basket of currencies. The objective here is to investigate the degree of both commodity prices and exchange rate pass-through to domestic inflation in China. To accomplish this objective, we first investigate international commodity prices
18、 and RMB/USD exchange rate pass-through to PPI inflation and then assess PPI inflation pass-through to domestic inflation. By combining these two sets of estimates, we are then able to obtain estimates of both commodities prices and exchange rate pass-through to domestic inflation. The pass-through
19、equation for PPI from global commodity prices and the reminbi exchange rate can be written as follows: ttiitiiititTDDRMBPCOMDPPI += 43033021(1) where changes in PPIt, PCOMDt, RMBt, and TDDtrefer to producer price inflation, our commodity import price index, the RMB/USD exchange rate, and the total d
20、emand for Chinas industrial output, which is the summation of retail sales, fixed asset investment and exports.3Since an appreciation of the RMB/USD has a negative sign and a depreciation of the RMB/USD a positive sign, the coefficient for the RMB exchange rate therefore should be positive, that is,
21、 a depreciation of the RMB/USD exchange rate is associated with rising PPI inflation. The short-run (contemporaneous) elasticity between the producer price inflation and the international 2Campa, J. M. and L. S. Goldberg (2005), “Exchange Rate Pass Through into Import Prices”, Review of Economics an
22、d Statistics, November, 87 (4): pp 679-690. 3Given that China is less influenced by international food and fuel prices because of its food supply self-sufficiency and fuel subsidies, the ideal data series for variable, PCOMD, should exclude these two components. China Economics and Research - A Comm
23、odity Import Price Index for China - 13 January 2010 - 5 - commodity price inflation is given by estimated coefficient 20and the short-run (contemporaneous) elasticity between producer price inflation and RMB/USD exchange rate is given by estimated coefficient 30. The medium-run (over three months)
24、elasticity of the same relationship can be obtained by summing up the coefficients of contemporaneous change and three lags of each external factor terms=302iiand=303ii, respectively. We use two-stage least square to control for potential endogeneity among the explanatory variables. Table 2: Pass-th
25、rough elasticities of PPI inflation to producer price inflation Dependent Variable: Producer Price Inflation Constant -1.97* (-2.85) Commodity Price Inflation 20 (Short run) 0.10* (4.54)=302ti (Medium run) 0.18* 4.94 USD/RMB Exchange Rate 30 (Short run) 0.22 (1.20)=303ti (Medium run) 0.32* 35.6 Tota
26、l Demand (Control Variable) 0.08* (2.36)Adjusted R2 0.899 Note: 1) Total demand is defined as the summation of retail sales, fixed asset investment, and exports of goods. 2) T-statistics are in parenthesis and F-statistics for those summations of coefficients are in brackets. *, * and * indicate sta
27、tistical significance at the 1%, 5% and 10% levels respectively. Source: Authors estimates The estimation results of equation (1) are summarized in Table 2. We find that the pass-through elasticity of commodity price inflation to producer price inflation is at around 0.10 in the short run and 0.18 i
28、n the medium run (both statistically significant) for the sample period. This suggests that a 10% increase in international commodity prices would lead to an increase in Chinas PPI by 1.0 percent in the short run and about a 1.8 percent increase in the medium run. Meanwhile, the pass-through elastic
29、ity of the renminbi exchange rate to producer price inflation is at around 0.22 in the short run (but statistically insignificant) and 0.32 in the medium run (statistically significant). This implies that, other things being equal, a 10% appreciation of the renminbi exchange rate would lead to a dec
30、rease in the producer price by about 3.2 percent in the medium run. Pass-through of producer price inflation to non-food CPI inflation Using a similar framework, pass-through of producer price inflation to Non-food CPI inflation can be written in this equation: China Economics and Research - A Commo
31、dity Import Price Index for China - 13 January 2010 - 6 - ttiititDummySalesPPICPI += 433021(2) where Salestrefers to growth in real retail sales, which acts as a control variable for domestic demand. Since there is a ten consecutive months of deflation in China, this suggests there is a possible reg
32、ime shift in the inflation data series. We therefore use a dummy variable to control for the effect.4By the same definition, the short-run (contemporaneous) elasticity between non-food consumer price inflation and producer price inflation is given by estimated coefficient,20. The medium-run (over th
33、e next four months) elasticity of the same relationship can be obtained by summing up the coefficients of contemporaneous change and three lags of PPI inflation terms=302ii. We use two-stage least square to control for the potential endogeneity between retail sales and PPI inflation. Table 3: Pass-t
34、hrough estimates from PPI to non-food CPI Dependent Variable: Non-food CPI Inflation Constant -0.65* (-3.01) Producer Price Inflation 20 (Short run) 0.23* (7.70)=302ti (Medium run) 0.20* 24.13 Retail Sales 0.01 (0.25)Dummy -1.12* (-7.80)Adjusted R2 0.857 Note: T-statistics are in parenthesis and F-s
35、tatistics for those summations of coefficients are in brackets. *, * and * indicate statistical significance at the 1%, 5% and 10% levels respectively. Source: Authors estimates The estimation results of equation (2) are summarized in Table 3. We find that the pass-through elasticity of producer pri
36、ce inflation to consumer price inflation is at around 0.23 in the short run and 0.20 in the medium run for the sample period from Jul 2005 to Nov 2009. This implies that a 10 percent increase in producer price inflation would lead CPI inflation to increase by 2.3 percent in the short run and about 2
37、.0 percent increase in the medium run. It appears that contemporaneous effect is larger than the medium run effect, suggesting pass-through to CPI is predominated by contemporaneous effect and the lag effect tends to dissipate fast over time. Our proxy for domestic demand, growth in retail sales, ha
38、s a right positive sign, suggesting the higher demand pressure, the higher CPI prices. However, it is not statistically significant. The dummy variable is negative and statistically significant, suggesting there is indeed a regime shift in Chinas inflation process. 4For the dummy variable, we use a
39、value of “1” if non-food CPI inflation is negative for that month, and “0” otherwise. China Economics and Research - A Commodity Import Price Index for China - 13 January 2010 - 7 - Pass-through of commodity import price to Non-food CPI By combining the estimates above, we are then able to calculate
40、 the pass-through effect of increases in commodities prices to consumer price inflation. In the medium run, a 10% increase in commodity import prices would lead to a 0.36% (1.8*0.2) increase in non-food CPI inflation, holding other things constant. By contrast, a 10% appreciation of renminbi against
41、 US dollar would lead to a 0.64% (3.2*0.2) decrease in non-food CPI inflation, again holding other things constant (Table 4). The short-run effects of pass-through due to commodity price inflation and the exchange rate effect are relatively smaller. A 10% increase in commodity prices would lead to 0
42、.23% increase in CPI inflation while a 10% appreciation in RMB/USD exchange rate would lead to a 0.51% decline in non-food CPI inflation. Table 4: Pass-through estimates from commodities prices to non-food CPI Commodity Import Price Inflation Short Run 0.023 Medium Run 0.036 RMB/USD Exchange Rate Sh
43、ort Run 0.051 Medium Run 0.064 Source: ANZ Economics Concluding remarks We apply the Lespreyres method to construct a commodity import price index for China and find that the index has a close relationship with the producer price index. This suggests that the index could be used as a useful indicato
44、r to gauge the pass-through from commodity import prices to Chinas producer prices. We then carried out some empirical analysis and found that a 10% increase in Chinas commodity import price will likely lead to a 1.8% increase in PPI, which in turn leads to a 0.36% increase in Chinas non-food consum
45、er prices. This new commodity import price index will be a new and useful indicator for us to monitor Chinas inflation outlook. China Economics and Research - A Commodity Import Price Index for China - 13 January 2010 - 8 - Contacts ANZ Economics & Markets Research Warren Hogan Acting Chief Economis
46、t +61 3 9273 6251 Warren.H Lee-Anne Wastle Executive Assistant +61 2 9226 4647 Lee-Anne.W Australian Economics and Interest Rate Research Shane Lee Senior Economist +61 2 9226 4632 Shane.L Tony Morriss Senior Rates Strategist +61 2 9226 6757 Tony.M Julie Toth Senior Economist +61 3 9273 6252 Julie.T
47、 Dr. Alex Joiner Economist +61 3 9273 6123 Alex.J Daniel Bae Analyst +61 2 9227 1272 Daniel.B Melissa Vassallo Research Analyst +61 3 9273 1590 Melissa.V Katie Dean Senior Economist (Maternity Leave) +61 3 9273 1381 Katie.D Riki Polygenis Economist (Maternity Leave) +61 3 9273 4060 Riki.P Commodity
48、and Industry Research Mark Pervan Head of Commodity and Industry Research +61 3 9273 3716 Mark.P Paul Deane Rural and Regional Economist +61 3 9273 6295 Paul.D Scott Briggs Agricultural and Softs Strategist +61 3 9273 3552 Scott.B Natalie Robertson Commodity Research Analyst +61 3 9273 3415 Natalie.R Property and Financial System Research Paul Braddick Head of Property and Financial System Research +61 3 9273 5987 Paul.B Ange Montalti Senior Economist +61 3 9273 6288 Ange.M Liam Getreu Research Assistant Foreign Exchange and International Economics Research Amy Auster Head of Foreign Ex
