A Comparative Study on Transmit Mechanism among Commodity, PPI and CPI in China and U.S.

Based on post-WTO sample data, this paper investigates the interaction among commodity price index, PPI and CPI after China has entered World Trade Organization (WTO) and fulfilled its promise of opening certain sectors. Granger casualty test is employed to conduct this research and the test result shows that the most international commodity price index, Rogers International Commodity Index (RICI), can transmit the fluctuation of commodity price to CPI via PPI with a time lag of two quarters, exactly the sum of price-transmit lag from RICI to PPI and from PPI to CPI. In addition, this paper also explores the relationship among RICI, U.S. PPI and U.S. CPI during the same period and reveals that the same transmit mechanism existed for U.S. data as well. Besides, this paper also compares the rate of return of various asset classes with RICI. The comparison figures out a way for institutional investors such as social security fund not only to have a return beating inflation but also to profit from it by including commodity in the portfolio.