Abstract: Behind the rise in international commodity prices this year is the continued role of supply and demand. Domestic PPI thus accelerated upward, resulting in the following effects: (1) the rise of commodity prices weakened the real income of high exports. Under the situation of strong foreign demand, some midstream enterprises accelerated inventory replenishment and increased revenue despite the obvious erosion of profit margin driven by cost. (2) the impact of the epidemic on income and wealth concentration has led to a slow recovery of residents' consumption ability and willingness, a high demand price elasticity in the downstream consumer goods industry, and some midstream enterprises are temporarily unable to transfer the upward pressure of costs to retailers and consumers.

Over the same period, CPI was affected by the "stabilizer" of food prices, which deviated from the trend of PPI. We predict that PPI may continue to rise by 8.7% year-on-year in May, and commodity prices will form a differentiation trend of industrial metals continuing to rise and oil prices falling in the second half of the year. Considering that the "lard offset" situation may continue, the transmission efficiency of PPI upward to CPI will not be very high during the year, and CPI should not be higher than the target of 3% in this year's government work report.
We construct a dynamic stochastic general equilibrium (DSGE) model to analyze whether monetary policy should be tightened in response to the upward PPI. The conclusion is that compared with coping with the upward PPI, the policy should pay more attention to the insufficient domestic demand behind the expansion of ppi-cpi scissors gap. At present, to expand domestic demand, it is more necessary to maintain a relatively loose monetary environment in terms of total amount, limit the transfer of excessive credit to real estate, infrastructure and other fields, and give more tax incentives and financial support to the manufacturing industry. At the same time, maintaining a relatively loose monetary policy will also help ease the pressure of RMB Appreciation under the rapid rise of US inflation.
 
Full report: https://thinktank.phbs.pku.edu.cn/2021/zhuantibaogao_0605/31.html