Highlights in Business, Economics and Management FTMM 2022

Volume 5 (2023)

Inflation Measurement in China under the Coronavirus

Pandemic
Yuqi Liu *
School of Mathematics and Statistics, Lancaster University, Lancaster, United Kingdom
* Corresponding author: y.liu109@lancaster.ac.uk
Abstract. The consumer price index (CPI) and core consumer price index (core-CPI) are the main
indicators reflecting the price level and inflation of a country or region. The two indicators and their
transmission relationship are also widely concerned by the economic community. Theoretically,
these two indexes will not fluctuate suddenly. However, in recent years, due to the uncertainty of the
Corona Virus Disease 2019, the trends of both indicators have declined to vary degrees. This paper
will start with the CPI, CORE-CPI, and inflation rate from 2017 to the present, and analyze the
reasons behind their abnormal phenomenon. The results showed that the pork sales volume was
the main reason for causing the fluctuations. Understanding the reasons for the decline will help
China quickly formulate the most effective plan and help the inflation index to return to the right track.
At the same time, it timely leads the country out of difficulties.
Keywords: Inflation rate, consumer price index, core-consumer price index, pork price.

1. Introduction
Around the Spring Festival in 2020, the Corona Virus Disease 2019 broke out in Wuhan, the ninth
largest city in China and a major transportation hub in China, and quickly spread to the whole country.
the Corona Virus Disease 2019 has been having the characteristics of a long latent time and strong
infectivity, which has a huge negative impact on the Chinese economic development and people's
lives. In order to avoid further expansion of the Corona Virus Disease 2019, local governments have
taken strict measures such as home quarantine, extending the Spring Festival holiday, and delaying
the commencement of enterprises. Wuhan and other places at the center of the Corona Virus Disease
2019 even took strict measures to "close the city". The outbreak of Corona Virus Disease 2019 has
had a huge impact on the long-term and short-term development of China's economy. For China, the
emergence of Corona Virus Disease 2019 is a "black swan" event. Before the Spring Festival in 2020,
no one can predict the occurrence of this event, and certainly, no one can predict the huge impact it
may have on China's economy.
For the microeconomic analysis, the measures taken to prevent and control the virus, such as
restricting travel and closing stores, have changed people’s consumption habits, such as dining,
traveling and shopping. However, people's spending on protective equipment has increased
significantly. At the beginning of the outbreak, the amount of anti-epidemic goods in the market failed
to meet the needs of residents. In general, the restrictions on residents' travel caused by the virus
prevention and control have severely impacted the offline commodity trading market, but at the same
time, it has promoted the development of the pharmaceutical industry and the reform of the market
structure.
For the short-term macroeconomic analysis, the impact of the Corona Virus Disease 2019 has had
a great impact on residents' consumption in terms of panic and income expectations. Smith (2006)
believed that the characteristics of the new onset, infectivity and limited means of treatment of the
sudden epidemic would cause sharp fluctuations in public sentiment, and consumer confidence and
expectation are important channels for the macro-economic impact of the Corona Virus Disease 2019
[1, 2]. The panic and pessimistic expectations caused by the above characteristics of Corona Virus
Disease 2019 reduced the consumption willingness of the residents in the short term and restrained
the consumption demand of the domestic market. At the same time, people's pessimistic expectations
of future employment and income caused by the epidemic situation have increased the output of

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preventive savings of households and further squeezed consumer spending. In the short term, the lack
of consumer confidence has led to a large downward trend in the overall consumption scale of society.
And the virus has caused great volatility in financial markets, which makes investors more cautious
in choosing investments and reducing the scale of investments. The increase in market risk makes the
credit audit of banks and other institutions more stringent, leading to more difficult financing for
enterprises. During this special period, the Chinese government strictly controlled the flow of
international personnel, the import and export of goods, while the reduction of domestic production
scale led to a decrease in the export volume of Chinese enterprises.
In the long term, the epidemic will bring many changes to people's consumption habits and
products. In terms of consumption habits, various traditional offline consumer markets have
accelerated the online transformation. The integration of information and communication
technologies represented by the Internet, big data, blockchain, 5G, etc. with various traditional
industries, and various non-contact consumption methods have been widely studied and accepted by
Chinese consumers. In terms of consumer content, people's demand for various non-contact
economies has driven the growth of various online services. Online office, online entertainment,
online education, online medical and other consumer fields have gained unprecedented attention and
development. The technological innovation and transformation of the industrial chain continue to
provide people with all kinds of new consumer products.
The inflation rate is one of the most important data to measure the economic index. The outbreak
of COVID-19 has caused some economists to worry about high inflation rates, but the actual trend of
inflation in the actual observation is not the same as the speculation. Also, accurately grasping the
epidemic trend is the premise of economic analysis. According to the available public information,
Dr. Zhang Wenhong, from the Infection Department of Huashan Hospital affiliated with Fudan
University, made three kinds of judgments about the trend of the epidemic: (1) The prevention and
control measures are appropriate, and the epidemic will be fully controlled within two months. (2)
The severity of the epidemic exceeded expectations, and it took more than half a year and less than
one year to fully control it. (3) The epidemic situation is completely out of control, causing a global
pandemic. Academician Zhong Nanshan said in an interview with Reuters on February 11, 2020, that
the new cases of new coronavirus pneumonia have declined in some regions, and the epidemic
situation is expected to ease [3]. Based on the judgment of many epidemiologists, this paper will
analyze the Chinese Consumer Price Index, Core-Consumer Price Index, and inflation rate in recent
five years. Therefore, researching these three indicators under the virus can play a certain helpful role
in the recovery of economic development.

2. Analysis Based on the Inflation Indicators

According to CEIC's official data, China's CPI index, inflation rate and core-CPI index all showed
different downward trends during the peak period of the COVID-19 outbreak.
2.1. Consumer Price Index
Figure 1 shows the change in Consumer Price Index from 2017 to 2022. CPI is a macroeconomic
index reflecting the changes in the price level of consumer goods and services generally purchased
by households. It is a measure of the relative changes in the price level of a group of representative
consumer goods and services over time in a specific period. It can be seen more intuitively that after
2020, that is after the outbreak of COVID-19, the CPI experienced a significant decline, from 101.8
in 2017 to 105.4 in 2019 and the 99.5 by 2020. The CPI growth rate decreased due to the decrease in
consumption opportunities due to home isolation in 2020, but increased because of the recovery of
consumption and compensatory consumption in 2021. therefore, the CPI growth rate was like the rate
after the virus in the whole of 2021 [3].

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Figure 1. Chinese CPI in recent five years [4].

Chinese CPI consists of food and non-food items, with weights of about 30% and 70% respectively.
Food items have a more significant impact on CPI than non-food items. So, the decline of food prices
is the main reason and driving force for the downward trend of the Consumer Price Index. Because
the composition of consumption basket depends on its own actual situation, the weight of food and
beverage in the CPI of developed countries is obviously lower than the level of China. But in Chinese
CPI, the weight of pork and other meat is higher, which is inseparable from the living habit of Chinese
residents. So, pork prices almost dominate the CPI. First, due to the COVID-19, transportation
restrictions and feed shortages may interrupt the normal supply of pork, resulting in a large amount
of pork sitting in warehouses without channels to sell. As a result, there was a temporary spike in
pork prices, but it will be followed by the releasing and the resumption of the catering industry, with
vendors choosing to sell their pork in one go. This can lead to a sudden increase in the amount of
pork on the market without a rise in demand, leading to lower prices. Second, because of the impact
of the COVID-19 epidemic in some areas, there have been many cases where people go out to eat
together and are pulled to centralized isolation. This will greatly reduce people's enthusiasm for eating
together, and pork consumption is bound to be affected.
In addition to pork prices, the decline in CPI is also due to the decline of residents' consumption
expenditure are the reduction of residents' income and lack of consumer confidence under the impact
of the epidemic. Because of the COVID-19, some small and medium-sized enterprises have been
unable to sustain themselves and chosen to close-down. As a result, the unemployment rate increased
significantly, and the overall growth rate of residents' income was relatively slow, which was still far
from that before the virus. And people who have not lost their jobs will choose to put a large part of
their salary into the bank as a precaution. This means that: on the one hand, the trend of per capita
consumption expenditure and disposable income of residents is falling and recovering at the same
time, indicating that the decline of residents' income under the impact of the epidemic is an important
reason for the decline of consumption expenditure; On the other hand, the recovery of per capita
consumption expenditure is significantly lower than that of per capita disposable income, indicating
that the impact of the epidemic has increased residents' concerns about future uncertainty, resulting
in insufficient consumer confidence and enhanced savings motivation. After the end of the subsequent
isolation requirements, the residents did not make compensatory and retaliatory consumption [5].
Therefore, the slow growth of income limits people’s daily expenses, making people's desire to

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consume less. According to the official data of the National Bureau of Statistics of China, the
cumulative year-on-year growth rate of total retail sales of consumer goods reached a historic low of
-20.5% in February 2020. Since the total retail sales of social consumer goods in the first half of 2020,
that is, during the epidemic, shrank significantly, and the rebound intensity of residents' consumption
in the second half of the year was not enough, the total retail sales of social consumer goods in 2020
was lower than that in 2019, and there was no so-called rebound, which had a drag effect on economic
growth. This is the reason for the sharp decline of CPI.
2.2. Core-Consumer Price Index
Figure 2 shows how the Core-Consumer Price Index (Core-CPI) changed from 2017 to 2022. The
Core-CPI was proposed by the American economist Gordon in 1975. It is a residential price index
excluding the product prices that are greatly influenced by climate and seasonal factors. The idea is
that temporary increases in the price of goods for supply reasons do not represent a long-term trend
of rising prices. In order to accurately judge the long-term trend of price increases, the effect of much
larger changes in the food and energy components of consumer prices than in other components
should be deducted [6, 7]. As can be clearly seen from Figure 2, the index has been in a declining
state throughout the whole 2020. Until 2021 it took to gradually return to pre-virus levels.

Figure 2. Chinese core-CPI in recent five years [8].

China uses the elimination method as the measurement method of Core-Consumer Price Index.
By specifically analyzing the historical data of Chinese price changes, select the items that are
eliminated according to the actual situation, fully consider the impact of food, energy and capital
interest rates on the consumer price index, and compile the consumer price index that excludes items
that cannot be controlled by the central bank, such as food and primary energy, as the Core-Consumer
Price Index of China. After deducting energy and food, the "core CPI" continued to decline during
the epidemic. It further confirms the above judgment on insufficient effective macroeconomic
demand and negative output gap. It also can be seen from the figure 2 that the core CPI hit a record
low in December 2020, which indicates that the actual demand of residents is still weak under the
influence of repeated epidemics and cold waves. To sum up, there are several reasons for the decline
of Core-CPI. First, it has something to do with the recent multi-site spread of the epidemic, which

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has led to the slow growth of the contact service industry, such as the continuous negative growth of
the transportation sector and the low growth of the education, culture and entertainment sector;
Second, it is related to the slowing down of residents' income growth under the impact of the epidemic,
such as the continuous negative growth of residential and clothing prices; Third, it is also related to
the high growth rate of service projects in 2019, which is not conducive to the improvement of year-
on-year growth rate in 2020 technically.
2.3. Inflation Rate
As shown in Figure 3, from 2016 to 2021, China's inflation rate (last year =100) was respectively
102, 101.56, 102.1, 102.9, 102.5 and 100.9. It can be seen that China's inflation rate has decreased to
a small extent since the outbreak of the COVID-19 in 2020.

Figure 3. Chinese inflation rate in recent five years [9].

According to the reduction of CPI and core-CPI mentioned above, the reduction of inflation rate
is obvious. From the data of various countries during the epidemic period in history, including the
SARS in China in 2003, it is confirmed that after the epidemic, the downward trend of inflation is
almost universal. From the perspective of the duration of the epidemic and the number of deaths, the
more serious the epidemic, the more obvious the impact on inflation. The possible reasons for this
result: First, the uncertainty after the epidemic increased the precautionary savings of the people,
while the demand for investment declined. Second, the "belief scar" formed by the epidemic will
continue to shape people's perception of extreme negative impacts. The third is the resource mismatch
caused by various nominal and real frictions in the economy. In the "post epidemic era", productivity
may still be low, thus driving down the potential output and inflation trend. However, compared with
the epidemics experienced by some European countries, this new epidemic is still different from
others. First, after this epidemic, the financial and monetary authorities have carried out
unprecedented policy assistance. The large-scale stimulus around the world has avoided the bank
bankruptcy or large-scale unemployment, and the loose monetary policy has avoided the credit
tightening and liquidity shortage, which are conducive to driving up inflation. Government adhered
to the system theory, implement macro policies in accordance with the macro governance framework
with Chinese characteristics, comprehensively solve cyclical and structural problems, and achieved

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the organic unity of growth momentum and volatility management, cross cycle and counter cycle
policies [10]. Secondly, vaccination has reduced the number of closed cities, which is conducive to
increasing consumption and promoting economic development. Third, although some retail stores
and factories are closed, other industries can mitigate the impact of the epidemic through home office.
Fourth, the disorder caused by the epidemic and the increase in transportation costs are passed on to
consumers, which also makes some goods’ prices rise.

3. Conclusion
In conclusion, as a special period in China, the COVID-19 will certainly have an impact on the
economy. The factors that influence inflation include both exogenous and endogenous factors, short-
term fluctuations and cyclical adjustment. On the one hand, the CPI dropped significantly due to the
price reduction of pork, and on the other hand, the overall economic situation was sluggish, which
led to the reduction of people's consumption desire. The decline of Core-CPI can also confirm this,
because most of the index is calculated from food and energy. It can be seen from the figures that the
slope of Core-CPI decline is higher than that of CPI. The last is the inflation rate. There is no doubt
that it is the most intuitive to see the inflation situation in China. According to this situation, China
can make corresponding adjustments to production development, public services, education system,
etc., reduce unnecessary labor costs and promote the transformation and reform of intelligent
production and lifestyle. Secondly, attach great importance to the transmission mechanism of fiscal
and monetary policies during the epidemic, and improve the currency circulation. Also, actively solve
the problem of a large number of unemployed people and the problem of food and clothing caused
by lower income. Finally, under the guidance of the new development pattern, the government needs
to further promote structural reform and adjustment, and fully release the potential growth space of
China's economy by building new dividends and solving structural problems.

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