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Inflation and relative price variability: a revisit

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  • Eric Chang
  • Joseph Cheng

Abstract

Bomberger and Makinen reported in 1993 that the significant positive relationship between relative price variability and the rate of inflation, documented by Parks in 1978 and by others, disappears when the oil-shock years 1974 and 1980 are excluded from the sample. Using a sample of yearly and monthly observations of both a 12- category group and a 202-category group of personal consumption expenditures, evidence is found that Bomberger and Makinen's finding is sensitive to the level of commodity aggregation and to sampling intervals. Specifically, Parks' results are reinstated when the supply shock years of 1974, 1980 and 1990 are eliminated from the annual and monthly samples. Allowing for asymmetrical responses of relative price variability to positive and negative inflation further strengthens the relation between relative price and inflation. The overall evidence renders strong support for the classic findings by Parks and is consistent with the hypothesis of downward price rigidity of some sectors in the economy.

Suggested Citation

  • Eric Chang & Joseph Cheng, 2002. "Inflation and relative price variability: a revisit," Applied Economics Letters, Taylor & Francis Journals, vol. 9(5), pages 325-330.
    • Handle: RePEc:taf:apeclt:v:9:y:2002:i:5:p:325-330
    DOI: 10.1080/13504850110067441
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    Cited by:

    1. J. Ulyses Balderas & Hiranya Nath, 2007. "Inflation and relative price variability in Mexico: the role of remittances," Applied Economics Letters, Taylor & Francis Journals, vol. 15(3), pages 181-185.
    2. Dieter Nautz & Juliane Scharff, 2012. "Inflation and relative price variability in the euro area: evidence from a panel threshold model," Applied Economics, Taylor & Francis Journals, vol. 44(4), pages 449-460, February.
    3. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Isaac Mwangi, 2013. "Commodity price shocks and inflation in a net oil-importing economy," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 37(2), pages 125-148, June.
    4. Cleomar Gomes da Silva & Gilberto O. Boaretto, 2018. "Inflation and Relative Price Variability in Brazil: A Time-Varying Parameter Approach," Economics Bulletin, AccessEcon, vol. 38(4), pages 1947-1956.
    5. Sartaj Rasool Rather & S. Raja Sethu Durai & M. Ramachandran, 2015. "Inflation and the Dispersion of Component Price Indices: A Case for Four Percent Solution," Working Papers 2015-134, Madras School of Economics,Chennai,India.

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