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What Drives China~s Food-Price Inflation And How Does It Affect The Aggregate Inflation?

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Executive Summary

It is typically argued that China's food-price inflation has been mainly driven by supply-side shocks including natural disasters. This paper, however, shows that demand pressures have played a more important role from a medium-term perspective. This suggests surging food prices may call for policy reactions even if non-food-price inflation is tame. Meanwhile, the authors find food-price inflation has not generated significant second-round effects on non-food-price inflation. In particular, while food-price inflation has pushed up China's inflation expectations, it has not been an important determinant of wage growth. This situation may change as workers gain more bargaining power in wage setting in the medium term.

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