By Deng Yusong, Institute of Market Economy of DRC

Research Report No 147, 2012

Keeping commodity prices basically stable is one of the major goals of macroeconomic control. As changes in commodity prices result from the combined action of multiple factors, it is above all necessary to stabilize the price fluctuation cycle through macroeconomic control and conduct all-round, timely and accurate monitoring of prices and, on the basis of this, take more proactive and relevant policy measures according to major factors that have an effect on price changes, especially wild fluctuations in prices.

I. Further Strengthen and Improve the Work on Price Monitoring

The general price level is a comprehensive reflection of the operation of national economy, and one of the major indicators that countries in the world use in macroeconomic control. Therefore, the governments of various countries and relevant research institutions attach great importance to the monitoring, prediction and early warning of changes in commodity prices. From the perfective of macroeconomic operation and control, when the price, especially CPI (consumer price index), falls within the mild range of 0-3%, the rise is moderate; when the CPI runs between 3% and 5%, there will be obviously growing attention to the change of price; and when the price rises over 5% or is negative growth (i.e. deflation), inflation control or deflation prevention will generally be regarded as an important goal of macroeconomic control, and adjustment will be made accordingly in the macroeconomic control policy. In this sense, the key to the monitoring and early warning of commodity prices is to make proactive judgment on possible unusual fluctuations, which makes it necessary to conduct all-round, timely and adequate market monitoring, especially of some leading price indicators. It is suggested that the work of monitoring be further strengthened and improved by drawing on international experience

First, we should further improve the price monitoring system and expand the scope of monitoring. Price monitoring serves the purpose of macroeconomic control and assists the government in price decision making. It mainly involves monitoring and judging changes in and movements of market prices surrounding the government goal of keeping the general price level basically stable. Price monitoring thus needs to be conducted in a wide and representative range and in a timely and continuous manner. At present, with many government agencies including the National Bureau of Statistics of China (NBS) as well as some societies and non-government organizations monitoring prices of commodities of various sorts, the scope of price monitoring has continuously expanded, and the work strengthened in terms of timeliness and continuity. Compared with developed countries such as the United States, China's price monitoring has a certain gap to bridge in such aspects as monitoring scope, timeliness and continuity. In order to make a more accurate judgment on the overall price situation, it is suggested that we, as countries like the United State have done, should further improve the price monitoring and related systems, establish a relatively regular monitoring reporting system, specify the areas to be covered, monitoring points and varieties of goods to be monitored, and conduct price monitoring in an uninterrupted manner, with a view to correctly comparing price changes in different periods, accurately estimating the trend in price changes and providing all-round, accurate and sustainable data for macroeconomic control and relevant decisions.

Second, we should further strengthen price monitoring of major commodities and shift monitoring priorities forward. From China's CPI and PPI (producer price index) changes in the past, an unusual fluctuation in commodity prices is generally closely linked to the fluctuation in the prices of some major commodities. For example, the drastic fluctuation in hog price has an important influence on CPI fluctuation, while changes in prices of bulk commodities such as petroleum and steel produce an important impact on PPI. Therefore, to monitor and give a warning against unusual price fluctuations requires us to focus on some major commodities. Factors affecting price changes in such commodities vary greatly. For example, the price fluctuation in agricultural and livestock products such as hogs is more obviously affected by supply changes, while the petroleum price fluctuation is more subject to international factors. We should also recognize that, among macroeconomic indicators, price is a lagged indicator, and the price of any commodity at any point in time is virtually the initial result of the combined action of many factors. That is, to monitor and give a warning as to prices of major commodities, it is necessary to shift monitoring priorities forward, find out primary factors affecting the change of commodity prices, identify related indicators from these factors and, by monitoring these indicators, predict the trend in subsequent price changes. Currently, China has initially established monitoring systems for some major commodities; for example, regular monitoring is conducted on livestock products such as hogs in terms of price, the number of breeding stock and the number of hogs for sale, etc., and such bulk commodities as coal, steel and refined oil are also monitored as to price, production and inventory. It is suggested that efforts be made to further improve price monitoring systems for major commodities and, on the basis of price monitoring in particular, pay more attention to monitoring some important indicators affecting the supply and demand of major commodities by shifting monitoring priorities forward, so that we can truly give warnings of unusual price fluctuations in advance.

Third, we should further improve monitoring information release systems. At present, the country's price monitoring remains inadequate coverage, monitoring information has yet to be improved in terms of timeliness and continuity, and inadequacies in release of price monitoring information are more apparent. Because it is common that monitoring information collected by various departments and agencies cannot be released in a timely, all-round and continuous manner, the accuracy of price analysis, prediction and warning is affected to a certain degree. It is suggested that we further improve and strengthen monitoring information release systems and especially, specify the release system on monitoring information by government departments and make provisions on the timeliness and continuity of information release.

II. Pay Attention to Effects Induced by Monetary Factors on Commodity Prices, and Keep Monetary Policy Stable

Among major factors affecting commodity prices, monetary factors are the focus of attention. Milton Friedman, a leading proponent of the monetarist school of economics, maintained that there may be many reasons for short-term change in the price of a particular commodity and in the general price level. But long-term and lasting inflation is always a monetary phenomenon, caused by the growth of money exceeding that of gross output. The change in monetary policy has a direct effect on monetary supply and demand and then produces major effects on real economy, asset prices and the general trend of price. To keep commodity prices basically stable, monetary policy is required to remain stable. But monetary policy is also an important means of macroeconomic control, and at the operational level, whether or not to adjust monetary policy requires attention to be paid not only to price changes but also to such aspects as economic growth. Based on past experiences in the change of monetary supply and commodity prices, the change of monetary supply also has a significant influence on that of commodity prices, but such influence lags behind. At the same time, major and minor adjustments in monetary policy will produce different effects on commodity prices, and a dramatic change in a short period of time will have a great lagged impact on prices. The longer an adjustment in monetary policy lasts, the more noticeable the accumulative effect of monetary policy is and the greater influence the monetary policy has on prices in the later period. Considering the features of monetary policy and the characters of its influence on prices, it is suggested that when monetary policy is adjusted, consideration be given to diverse objectives, and a neutral monetary policy be implemented by considering both short-term and long-term effects of the policy.

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