For the prediction of CPI's year-on-year trend in 2009, we have mainly taken into account the following three factors: first, the recent trend of food and non food prices; two, the average value of CPI in different months (2001 -2008); and three, the influence of Spring Festival factors on CPI ring ratio in 1-2 months.

Based on the above factors, we predict that the trend of CPI in 2009 will show a trend of "two heads high and middle low" overall. The annual CPI will be 0.3% year-on-year, and the 1-4 annual CPI will be 0.2%, -0.6%, -0.4% and 1.8%, respectively.

The specific prediction method is mainly to divide the CPI year into two parts: the new factor and the tail factor.

Since September last year, the rate of deposit has been reduced from 4.14% to 2.25% after four interest rate cuts. The deposit reserve ratio has been adjusted for four times, the large financial institutions have been reduced from 17.5% to 15.5%, and the small and medium-sized financial institutions have been reduced from 17.5% to 13.5%.

But the relaxation of monetary policy can not play a role in price in the short term. Deflation is still inevitable in the middle of 2009.

On the one hand, from the perspective of money supply (M1 and M2), since the end of last year, although the supply and growth rate of basic currencies remain high, the decline in money multiplier has made the growth rate of money supply decline more obviously.

Because of the high correlation between price level and money supply (especially M1), the decline of money supply naturally leads to a decline in price level.

As for the decline in the monetary multiplier, it is the expectation of economic growth and inflation.

From the point of view of money demand (investment), first, raw material prices have dropped substantially, but it is still necessary for us to digest the relatively high raw material stock before. Secondly, although interest rates cut down the cost of capital, rational investors will mostly borrow new debts to repay old debts instead of investment. Once again, because of the rigidity of labor force, it is still not easy to lay off and reduce wages. Finally, due to the poor economic prospects, the expected rate of return on investment will decline and investment costs will fall relatively slowly, which will make private investment less willing.

Whether government investment can drive private investment still needs further observation.

From the point of view of money demand (consumption), one is that China's consumer credit is not developed, and that the reduction of interest rate has limited stimulating effect on consumption. The two reason is that the decline in revenue expectations resulting from poor economic prospects will inevitably have adverse effects on consumption. Three, because of the decline in capital markets and the downturn in the real estate market, people's poor expectation of asset income will result in negative effects of wealth, which will naturally affect consumption.

From the perspective of money supply, although the central bank eased monetary policy, it increased the supply of money and urged commercial banks to increase loans.

However, because of the poor economic prospects and low risk and profitable investment projects, commercial banks will naturally "grudging loans" to prevent the increase of non-performing loan rates.

We can see that since January 2008, the growth rate of deposits has begun to significantly exceed the growth rate of loans, so that the gap between deposits and loans has been expanding.

On the other hand, from the currency equation MV = PY, P = M * V/Y, the decline of the velocity of money is another important reason for price decline.

Poor industrial investment prospects, and the downturn in the stock market and real estate market will naturally precipitate money in the banking system, and demand deposits will become regular deposits, thus reducing the speed of money circulation.

The increase in interest rate cut also makes people prefer long-term deposits to prevent the risk of falling interest rates.

We can see this from M1 dropping faster than M2.

Data show that from January 2007 to present, the proportion of the balance of enterprise deposits / deposits first increased and then decreased, which clearly reflected the changes in the willingness of enterprises to invest, while the proportion of time deposits / savings deposits was just the opposite.

Last December was a sudden change in anticipation of change, and also a change point in the speed of money movement.

From the above formula, we can also see that in the deceleration period, as the output (Y) declines and the velocity of money (V) and the money supply (M) decrease more rapidly, the price level will decrease. In the recovery period, the price level also has a downward trend as the output (Y) rises, that is, the velocity of money (V) and the money supply (M) remain unchanged.

Therefore, this is why even after the recovery period, that is, in the first quarter of 2009, the economic growth slowed to the bottom and began to pick up in the second quarter, and the price level will still drop for some time.

Therefore, we say that although the increase in money will eventually be above prices, the relaxation of monetary policy in the short term will not have a significant impact on prices until a significant change is expected, that is, after it has a significant effect on output.