Coal price fluctuations in China: Economic effects and policy implications

The price of coal fluctuated widely in the past few years in China. It is widely believed that rising coal prices can push up the inflation; this affected the determination of the policy of controlling coal price. This paper examines whether the rising coal price determines inflation in China. Bootstrap correlation test indicates that the Consumer price index (CPI) is not always positively correlated to the coal price in preceding months. The Bootstrap Granger test shows that coal price Granger-causes the CPI with 4-6 lags. However, many regression coefficients in the Granger test are negative and significant, which is consistent with the result of the bootstrap correlation test and contradicts the cost-push theory. Based on the Vector autoregression (VAR) model, bootstrap impulse response analysis reveals that coal price affects the CPI, but the directions of the effects vary and cancel each other out over a long period. Therefore, we find no evidence that shows a rise in coal price leads to cost-push inflation. Electricity price regulations, the price filter effect in the industry chain, and the Fisher currency trading equation theory can be used to explain this phenomenon. Finally, we conclude that both coal prices and the CPI are caused by inflation (in addition to market liquidity) instead of being the cause. Published by AIP Publishing.