Imagine the following. A country doubles its fiscal deficit, increases its public spending (especially on public investment), accelerates payments to the unemployed, and re-opens its economy after a pandemic. You’d think inflation would soar. China has all those policy traits, but the latest inflation print for December shows headline inflation at an anemic 0.2%, while core inflation is at 0.5%.

And look at recent years. Headline inflation has been as high as 5% (driven by a swine flu-related spike in pork prices), while core inflation has struggled to reach even 2% (Chart 1). Many are looking for the recent surge in commodity prices (such as oil and soybeans) to lead to higher headline inflation and then higher core inflation in regions like the US or euro area. But the China case shows that the transmission from commodity inflation to core CPI inflation is weak.