context: Liu Yuanchun is active ahead of the upcoming Two Sessions, and was invited to the February State Council bimonthly study session to lecture on the role of consumption in driving economic development.
Price levels are a crucial element of macroeconomic management, but their formation and regulation are far more complex than traditional supply-demand adjustments suggest, aruges Liu Yuanchun 刘元春 Shanghai University of Finance and Economics president. He critiques the neo-Keynesian emphasis on inflation targeting, arguing that conventional price indices like the Consumer Price Index (CPI) and GDP deflator fail to fully capture macroeconomic performance. Instead, he advocates for a broader, more integrated price index system that includes financial indicators like stock and real estate prices.
He argues that
- a broader price index that integrates stock and real estate prices with traditional inflation measures is needed
- traditional indices such as the CPI and the GDP deflator are insufficient for capturing economic reality, especially in the face of financial market fluctuations
- he points out that the 2008 financial crisis exposed the limitations of CPI-based monetary policy, as asset bubbles and financial instability were not reflected in core inflation metrics
- price fluctuations must be analysed from both micro and macro perspectives to avoid misleading policy responses
- Liu notes that structural changes—such as technological advancements and industrial upgrades—can cause discrepancies between micro-level price movements and macro-level inflation data
- for example, while PRC’s CPI remains low, its Producer Price Index (PPI) is negative, indicating underlying deflationary risks
- furthermore, current statistical methods, like those used to calculate housing costs in CPI, may distort actual price trends
- lessons from history in price governance must be noted
- Liu warns that deflation is harder to manage than inflation, as it disproportionately impacts producers, leading to profit declines, unemployment, and economic contraction
- he draws historical comparisons, noting how Roosevelt’s policies in the 1930s helped break the deflationary spiral by supporting employment and improving investment returns
- he emphasises that effective deflation management requires structural reforms rather than just short-term stimulus
Ultimately, Liu calls for a nuanced approach to macroeconomic regulation—one that moves beyond simplistic inflation targeting and integrates financial stability, industrial structure, and firm profitability into policy design.