By Arthur Chen

Looking at the world economic crisis from the correlation between Chinese producer price index(PPI) and consumer price index(CPI).

In this article, I want to talk about the most recent economic topic in the world which is “stagflation”. Many scholars warned in May and June of this year that inflation is soaring, and the supply chain is broken, causing supply shortages, and the employment rate cannot return to the level before the pandemic. This gives a hotbed for stagnant inflation. The absolute majority of experts just turned a deaf ear to it at that time. It was not until the sudden power cuts in China at the end of September then everyone realized the seriousness. In September, Chinese industrial producer price index (PPI) reached a historical high of 10.7% compared with the same period last year (year-on-year). Since May this year reached 9% year-on-year, it has gradually increased each month, and producer prices have remained high for five consecutive months. Due to power cuts, the PPI in October is predicted to rise even more, and China is currently entering the peak of winter electricity and heating, and when the prices of natural gas and coal are rising, the PPI must be operating at a high peak, and it is likely to be higher than the next month. It will grow up every month. Look at the price trends of raw materials, especially changes in oil, copper, iron, metals, coal, natural gas, etc. this situation may go on into next year.

According to the definition, Chinese Producer Price Index (PPI) refers to the price change of when all products are first sold from the perspective of the producer. It is to measure price changes from the perspective of consumers, and to judge from the three production areas of industry, commodity and processing stage. When producers spend more on consumer goods and labors, they are likely to add this increased cost to consumers, so PPI is considered a leading indicator of the consumer price index. PPI price changes reflect the strength of commodity demand on the one hand, and on the other hand affect the changes in corporate profits and investment willingness. Therefore, the annual growth rate of PPI also reflects the activity of Chinese industrial economy. Because of the proper control of the pandemic, China has maintained a boom in exports from the supply side this year, as can be seen from the light upward curve of the PPI at the beginning of the year. But when it came to May, after the raw material surged directly over 9%, it was impossible to go back. This shows that the cost of producers continued to rise to more than 10% in September. If the demand side is equally strong, the cost increase in the past six months will inevitably be passed on to consumers and cause commodity prices increased. However, Chinese consumer price index was only 0.7% in September, and there was a 10% difference between the producer price index and the consumer price index. This shows that the domestic demand side is still affected by the pandemic and the people are expected to be weak due to the economic recession. Therefore, because of competition, no one dares to directly increase prices to consumers. As a result, there is a “price scissors” between the consumer price index and the producer price index as large as 10%. From a theoretical point of view, this shows the imbalance between the supply side and the demand side. Rising costs on the supply side cannot be passed on to the consumer side. As a result, producers will start to reduce the supply of goods and cut labors. In severe cases, they may close down operations. At consequence, the unemployment rate will rise, consumption power will decline and demand will decrease, and the economy will be going downward, but goods prices are still anchored in high level. This is the stagflation that everyone is afraid of. The above mentioned is the current bloody economic situation in China.

The increase in the price of raw materials for production has led to inflation in China. As a result, the prices of commodities exported from China have risen accordingly and export from Chinese supply side to Europe and the United States, on the other side of the world. Europe and the United States are also facing the potential threat of "stagflation". At present, almost all countries in the world are preventing the approach of stagflation. Stagflation refers to an economic phenomenon in which economic stagnation and inflation continue to go hand in hand at the same time, just like the United States in the 1970s. In that case, the monetary policy of the central bank cannot solve the problem alone, because a looser monetary policy will cause prices to soar further, and a tighter monetary policy will make the economy more depressed. The solution may be required the governments to raise bonds so as to output the  public expenditures more and reduce taxes at the same time, and then cooperate with the central bank to raise interest rates to suppress inflation, but this combination of policies will cause the burden of US Treasury bonds to continue to expand, creating the scourge of debt survivors. But this is a plan that has to be done. The current infrastructure rebuild proposed by the Biden government is to expand public expenditures. Using the multiplier principle of economics, the government's investment of US$1 trillion can encourage all private enterprises to increase their output value by several trillions, thereby increasing the employment rate and creating demand for the economic. However, the issuance of treasury bonds creates demand but the contraction of bond purchases, and interest rates raised to drive down demand are inherently contradictory practices. However, in order to solve stagflation, we must deal with it from various aspects at the same time. It's a tough task !

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