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Do producer prices lead consumer prices?

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  • Todd E. Clark

Abstract

From early 1994 to early 1995, inflation surged in the producer price indexes for crude materials and intermediate goods. For example, inflation in intermediate goods prices rose from 2.6 percent annually in the first half of 1994 to 7.1 percent over the next nine months. At the same time, however, inflation in the consumer price index remained low, at slightly less than 3 percent. Many analysts are concerned that recent increases in the prices of crude and intermediate goods may be passed through to consumers. If such pass-through occurs, the Federal Reserve's progress in moving toward price stability over time would be jeopardized.> Clark examines whether price increases at the early stages of production should be expected to move through the production chain, leading to increases in consumer prices. A review of basic economic theory suggests there should be a pass-through effect--that is, producer prices should lead and thereby help predict consumer prices. A more sophisticated analysis, though, suggests the pass-through effect may be weak. Clark examines the empirical evidence, which indicates that producer prices are not always good predictors of consumer prices. He concludes that the recent increases in some producer prices do not necessarily signal higher inflation.

Suggested Citation

  • Todd E. Clark, 1995. "Do producer prices lead consumer prices?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 25-39.
  • Handle: RePEc:fip:fedker:y:1995:i:qiii:p:25-39:n:v.80no.3
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    File URL: http://www.kansascityfed.org/publicat/econrev/pdf/3q95clar.pdf
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    References listed on IDEAS

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    1. Miron, Jeffrey A & Zeldes, Stephen P, 1988. "Seasonality, Cost Shocks, and the Production Smoothing Models of Inventories," Econometrica, Econometric Society, vol. 56(4), pages 877-908, July.
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    3. Chirinko, R S & Fazzari, S, 1994. "Economic Fluctuations, Market Power, and Returns to Scale: Evidence from Firm-Level Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(1), pages 47-69, Jan.-Marc.
    4. C. Alan Garner, 1995. "How useful are leading indicators of inflation?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-18.
    5. Oliver Jean Blanchard, 1987. "Aggregate and Individual Price Adjustment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 57-122.
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    Citations

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    Cited by:

    1. José Julián Sidaoui & Carlos Capistrán & Daniel Chiquiar & Manuel Ramos Francia, 2009. "A Note on the Predictive Content of PPI over CPI Inflation: The Case of Mexico," Working Papers 2009-14, Banco de México.
    2. Shahbaz, Muhammad & Tiwari, Aviral Kumar & Tahir, Mohammad Iqbal, 2012. "Does CPI Granger-cause WPI? New extensions from frequency domain approach in Pakistan," Economic Modelling, Elsevier, vol. 29(5), pages 1592-1597.
    3. Aviral Kumar Tiwari & Muhammad Shahbaz, 2013. "Modelling the Relationship between Whole Sale Price and Consumer Price Indices: Cointegration and Causality Analysis for India," Global Business Review, International Management Institute, vol. 14(3), pages 397-411, September.
    4. repec:ehl:lserod:56407 is not listed on IDEAS
    5. Gibson, Heather D. & Lazaretou, Sophia, 2001. "Leading inflation indicators for Greece," Economic Modelling, Elsevier, vol. 18(3), pages 325-348, August.
    6. Robert Lehmann & Timo Wollmershäuser, 2017. "Die Inflation kommt zurück! Immer mehr Firmen in Deutschland wollen ihre Preise anheben," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(05), pages 16-21, March.
    7. George, Edward I. & Sun, Dongchu & Ni, Shawn, 2008. "Bayesian stochastic search for VAR model restrictions," Journal of Econometrics, Elsevier, vol. 142(1), pages 553-580, January.
    8. Niclas Andrén & Lars Oxelheim, 2011. "Exchange rate regime shift and price patterns," International Journal of Managerial Finance, Emerald Group Publishing, vol. 7(2), pages 153-178, April.
    9. Tiwari, Aviral Kumar, 2012. "An empirical investigation of causality between producers' price and consumers' price indices in Australia in frequency domain," Economic Modelling, Elsevier, vol. 29(5), pages 1571-1578.
    10. Tiwari, Aviral Kumar & Mutascu, Mihai & Andries, Alin Marius, 2013. "Decomposing time-frequency relationship between producer price and consumer price indices in Romania through wavelet analysis," Economic Modelling, Elsevier, vol. 31(C), pages 151-159.
    11. Gerba, Eddie, 2015. "Have the US macro-financial linkages changed? The balance sheet dimension," LSE Research Online Documents on Economics 59886, London School of Economics and Political Science, LSE Library.
    12. Ülke, Volkan & Ergun, Ugur, 2013. "The Relationship between Consumer Price and Producer Price Indices in Turkey," MPRA Paper 59437, University Library of Munich, Germany.
    13. Carlos Huertas C. & Munir A. Jalil. B., 2000. "Relación Entre El Índice De Precios Del Productor (Ipp) Y El Índice De Precios Al Consumidor (Ipc)," BORRADORES DE ECONOMIA 003449, BANCO DE LA REPÚBLICA.
    14. Tiwari, Aviral Kumar & Suresh K.G., & Arouri, Mohamed & Teulon, Frédéric, 2014. "Causality between consumer price and producer price: Evidence from Mexico," Economic Modelling, Elsevier, vol. 36(C), pages 432-440.

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