Inflationary effect of coal price change on the Chinese economy

Abstract

This study investigates the pass-through effect induced by coal price fluctuations on the Chinese economy 2007–2011 based on a non-competitive input–output model. Three scenarios with different domestic tariff regulation alternatives, i.e., Actual Regulation (AR), No Regulation (NR), and Strong Regulation (SR), are simulated to reflect the effectiveness of different policies. At the sectoral scale, the Coking sector has the largest price variation under all scenarios while agriculture sectors and services sectors are the least sensitive. Nation-level impacts are examined by the weighted price changes of commodities used for different purposes. With the government regulation in reality, about 5% of the GDP deflator and CPI changes as well as 25% of the PPI change over the research period are attributed to coal price increase. Comparison shows the AR scenario brings more stable fluctuations but higher inflation than the NR scenario. The SR scenario confirms that authorities can remarkably relieve short-run inflation by controlling domestic electricity and heat tariffs. The induced inflationary expense sums up to between 0.03% and 0.97% of China’s GDP, around three quarters of which are burdened by investors and foreigners. The quantitative effect investigated in this study can serve as empirical evidence for policy makers regarding inflation control in China.