Abstract: As an indicator for measuring price levels, different calculation approachs for the CPI can reflect different information. Following the idea of "When Inflation Meets Housing Prices", this Brief recalculates the imputed rent for owner-occupied housing related to China's CPI measurement, and then obtains the adjusted CPI and the real interest rate based on the adjusted CPI. After a simple comparison between the adjusted CPI changes and various indicators such as money supply and demand, aggregate financing, and macroeconomic performance, we found that: the overall macroeconomic situation than the unadjusted CPI. Observing the trends of the adjusted CPI, the real interest rate, and their relationship with various economic indicators offers us the following insights:
First, the magnitude of the decline in the adjusted CPI and its duration since 2022 are both rare in history, which suggests that the current low inflation in China may be more severe.
Second, the current decline in nominal interest rates is lower than that of the price levels. It causes the real loan interest rate to continuously climb to around 6%, which is higher than the real economic growth rate.
Third, if the rate cut is significant enough to bring down the real interest rate, it will have a notable effect on boosting credit demand and restoring economic vitality.
Fourth, we can consider temporarily using the nominal GDP growth rate as the macro-policy target, adopt comprehensive measures to address the continued downward trend in price levels and nominal economic growth rates, boost the confidence of residents and businesses to increase total demand, and enable China to get rid of the current low inflation pressure as soon as possible.
