Production Chain Length and PPICPI Divergence: Analysis Based on the Global Input-output Price Model

Productivity and international energy price shocks are reflected in PPI and CPI via industrial chains. China's in-depth participation into the global value chains has increasingly lengthened its industrial production chains. The question is how the changing length of production chains will affect CPI and PPI, as well as CPI-PPI correlation? By constructing a global input-output price model, this paper offers a theoretical discussion on the impact of production chain length on the CPI-PPI divergence. Our findings suggest that the price shock of international bulk commodities has a greater impact on China's PPI than that on CPI. The effects on both China's PPI and CPI estimated by using the single-country input-output model are higher than the results estimated with the global input-output model.However, the difference between CPI and PPI variations estimated with the global inputoutput model is greater than the result estimated with the single-country input-output model,which supports the view that the lengthening of production chains, especially international production chains, leads to a divergence between CPI and PPI. Empirical results based on cross-national panel data also suggest that the lengthening of production chains has reduced the CPI-PPI correlation for countries, i.e. the lengthening of production chains has increased the PPI-CPI divergence. That is to say, policymakers should target not just CPI in maintaining price stability, but instead focus on the stability of both PPI and CPI. Efforts can be made to proactively adjust the price index system, and formulate the industrial chain price index.