Inflation risk in China: a view from structural instability in inflation inertia

Inflation in China has witnessed marked variations during the past decades. Has the inertia of inflation also changed? If so, does the structural instability in inflation inertia help mitigate high inflation risk in China? This article examines this question by addressing structural instability in inflation inertia based on consumer price index for China over 1980-2006. Employing the newly developed structural instability tests at unknown points, we find that the inertia of the consumer price inflation in China underwent a statistically significant break in 1997. We discuss the important implications of the empirical results in the paper.