Dynamic Price Index with Labour Income
A divergence between CPI and prices of housing in China since 2010 has been spotted, a phenomenon similar to what happened in Japan in 1980s. We construct a dynamic price index with labor income (DPIL) to represent the money’s purchasing power. The China’s evidence shows that, from 2010 to 2019, the DPIL rose above zero, constituting a major challenge to the stability of money’s purchasing power. Furthermore, our examination of the correlations between DPIL and unemployment rate reveals that a consistent positive correlation exists in six countries in the past decades, a finding that provides a new Phillips curve analytical framework for monetary policy.