Pork Market Shocks and Inflation Dynamics in China

บทคัดย่อ

Background and Objectives: Pork occupies a central position in China’s consumption basket and plays a critical role in shaping inflation dynamics, particularly through its substantial weight in food prices and its salience in public inflation expectations. Fluctuations in pork prices have long been associated with the so-called “pig cycle,” traditionally viewed as a supply-driven phenomenon rooted in biological production lags. However, with the increasing complexity of China’s food system, market liberalization, and heightened uncertainty arising from disease outbreaks, policy interventions, and global shocks, pork prices are no longer determined solely by supply-side factors. Demand-side pressures and precautionary behavior have become increasingly important, potentially amplifying inflation volatility. Existing studies often rely on linear frameworks or event-based approaches, which may obscure the nonlinear and state-dependent nature of inflation responses to pork-market shocks. Against this backdrop, this study aims to examine how different types of pork-market structural shocks—supply, demand, and precautionary demand—affect inflation dynamics in China across distinct inflation volatility regimes. By explicitly incorporating regime dependence, the study seeks to provide a more nuanced understanding of pork-driven inflation transmission and its implications for macroeconomic stabilization.

Methodology: The analysis employs monthly data covering the period from January 2009 to November 2024. A two-stage empirical strategy is adopted. In the first stage, pork-market structural shocks are identified using a structural vector autoregression (SVAR) framework inspired by the commodity-market identification strategy proposed by Kilian. Pork supply shocks are proxied by changes in production, demand shocks by slaughter volume, and precautionary demand shocks by real pork prices. In the second stage, the transmission of these shocks to overall CPI inflation and food CPI inflation is examined using both a linear benchmark model and a nonlinear Markov-switching regression. The Markov-switching framework allows inflation dynamics to differ endogenously between low- and high-volatility regimes, capturing nonlinear pass-through mechanisms that cannot be identified in linear models. In addition, the study investigates the role of policy-specific economic policy uncertainty indices in driving regime transitions, thereby linking pork-market shocks to broader macroeconomic uncertainty.

Key Findings: The empirical results reveal strong state dependence in the inflationary effects of pork-market shocks. In low-volatility inflation regimes, supply shocks and precautionary demand shocks are the primary drivers of inflation, while demand shocks play a limited role. In contrast, during high-volatility regimes, demand shocks and precautionary behavior dominate inflation dynamics, indicating that consumption pressures and expectation-driven responses become more influential when inflation is unstable. Across both regimes, food CPI inflation responds more strongly to pork-market shocks than headline CPI inflation, underscoring pork’s role as a key amplifier of food-price pressures. The analysis further shows that supply shocks exhibit delayed effects on inflation, consistent with the long biological production cycle in pork markets, whereas demand and precautionary shocks exert more immediate impacts. Moreover, monetary policy uncertainty emerges as the most important factor triggering transitions between low- and high-volatility inflation regimes, highlighting the interaction between commodity-specific shocks and macroeconomic policy credibility.

Policy Implications: The findings point to the necessity of explicitly state-contingent inflation stabilization policies in China. In low-volatility environments, policy efforts should prioritize supply-side stabilization by enhancing production resilience, improving disease prevention, and strengthening the pork supply chain to mitigate delayed inflationary pressures. In high-volatility regimes, however, demand management and expectation anchoring become more critical, requiring timely policy communication, real-time price monitoring, and measures to curb precautionary and speculative behavior. Strengthening early-warning systems for pork prices and integrating information from futures markets and policy indicators can further improve inflation management. More broadly, the results suggest that effective inflation control in economies where staple food commodities play a central role requires adaptive policy frameworks that recognize nonlinear transmission mechanisms and regime-dependent dynamics.