China’s Implementation of Monetary Policy in Relations to Changes of Inflation

5 min readMay 18, 2022


According to the latest price data released, China’s consumer price index (CPI) rose by 2.1% in April from a year earlier, up for the third consecutive month. The CPI has surpassed 2% again since November last year.

Meanwhile, China’s industrial producer (ex-factory price index) rose 8% year-on-year, down for the sixth consecutive month. However, it is up 0.6% month-on-month. On the other hand, the industrial producer (purchase price index) rose 10.8% year-on-year and 1.3% month-on-month.

There are some concerns in the market. In the case of high global inflation and supply chain distortions, will China’s inflation level continue to rise? At the same time, how does this change reflect China’s economic growth trend? What is the impact on the future direction of monetary policy?

Figure: Changes in producer prices for China’s industrial producers:

Source: National Bureau of Statistics of China.

Researchers at ANBOUND believe that the economic situation (reflected by CPI and PPI), needs to consider some structural factors under the COVID-19 pandemic. The supply side of inflation is still influencing the economy, but overall demand remains low. Therefore, monetary policy still needs to continue focusing on future growth stabilization.

Based on the structural change in consumer prices, food prices rose 1.9%., and non-food prices rose 2.2%. As a whole, consumer prices rose 3.0%, and service prices rose 0.8%. Specifically, the prices of vegetables and fruits have increased significantly due to the food situation. Some analysts believe that the pandemic-led increase in food reserves has stimulated the consumption growth of these foods. However, pork prices are still affected by the pig cycle and these prices continue to decline.

On the other hand, the rise in non-food consumer prices shows a reduced commodity production capacity. This capacity reduction is the result of three factors. They are the pandemic’s prevention and control measures, the transmission of higher energy and raw material prices to consumers, as well as the impact of decreased logistical levels (transportation and communication services prices rose to 6.5 percent).

Therefore, these changes reflect more about short-term supply and demand imbalances under the measures against the pandemic rather than the overall demand uptick consequence. In addition, the core CPI (excluding food and energy prices) fell steadily. However, it rose by 0.9% year-on-year and was down 0.2 percentage points from the previous month. This situation has reflected better the overall demand, though it is still sluggish. Thus, for now, the monetary policy has to make stabilizing growth its top priority.

Although the CPI broke through 2% in April and rose continuously, there is still a big contrast with the high global inflation. For example, inflation hit a new 40-year high in March as U.S. consumer prices rose 8.5%, and India’s inflation rate surged to a 17-month high of 6.95%. However, it is still far from the People’s Bank of China (PBoC) target of 3%.

Those various inflation rates mean that inflation levels are still moderate and that monetary policy options are still available. Similarly, the level of PPI continued to fall in April as policy control over energy and raw materials prices was strengthened. Hence, the ‘scissors gap’ between PPI and CPI narrowed continuously as China’s complete industrial chain was utilized to its advantage.

These circumstances indicate that China’s ability to absorb global energy and raw material supply distortions in the future is still stronger than other countries. Although imported inflation is still the main factor affecting prices in China in the future, overall, inflationary pressure in China is not significant.

It is important to note that even after the pandemic has been contained, the current changes in inflation show that insufficient demand will continue to be a problem for China’s economic growth. Capital Economics believes that moderate inflationary pressures may ease further in the coming months. The forecast is based on logistics problems easing and industrial outputs improving.

Furthermore, some economists have brought up one opinion. China’s lockdown and other COVID-19 restrictions have caused shortages and disrupted logistics in the short term. However, these measures may have a deflationary effect in the long run by suppressing consumer spending.

Since the beginning of this year, although the PBoC has taken measures like cutting reserve requirements to maintain sufficient liquidity, its focus is more inclined to use structural tools. This policy focus indicates greater concern about inflation and the external impact of the Fed’s interest rate hike.

ANBOUND researchers believe that monetary policy should still be centered on achieving the goal of future stable growth. On the one hand, the rise in moderate inflation creates policy space to promote aggregate and structural easing. On the other hand, the RMB depreciation has relieved some of the external pressure caused by the Fed’s interest rate hike.

In particular, the current economic situation in China is not only a structural problem in long-term development but also a cyclical problem under short-term complications. Besides that, the short-term disruptions caused by the pandemic have made both supply and demand problems prominent. Thus, this situation has required further aggregate policy easing to achieve a “soft landing” for the economy as soon as possible.

Final analysis conclusion:

Inflation in China rose moderately in April, reflecting more structural changes in the economy’s supply and demand as a result of the COVID-19 disruption. Meanwhile, the country’s overall lack of demand remains the biggest impediment to consistent growth in the coming period. Under such trend, monetary policy needs to promote easing, focusing on attaining “internal and external balance” to facilitate the economy’s “soft landing”.

Writer by Wei Hongxu
A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK

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ANBOUND is a multinational independent think tank, specializing in public policy research, incl. economy, urban and industry, geopolitical issues. Est. 1993.