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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, vol. 80(Q III), pages 25-39.
  • Handle: RePEc:fip:fedker:y:1995:i:qiii:p:25-39:n:v.80no.3
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. From PPI to CPI
      by ? in FRED blog on 2021-04-12 13:00:00

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    Cited by:

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    5. Robert Lehmann & Timo Wollmershäuser, 2017. "Inflation is Returning! More and More Firms in Germany Plan to Increase Prices," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 70(05), pages 16-21, March.
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    7. 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.
    8. 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.
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    10. Jing Sun & Jinhui Xu & Xin Cheng & Jichao Miao & Hairong Mu, 2023. "Dynamic causality between PPI and CPI in China: A rolling window bootstrap approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1279-1289, April.
    11. 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 3449, Banco de la Republica.
    12. Xiangyun Gao & Haizhong An & Weiqiong Zhong, 2013. "Features of the Correlation Structure of Price Indices," PLOS ONE, Public Library of Science, vol. 8(4), pages 1-9, April.
    13. 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.
    14. He, Yongda & Lin, Boqiang, 2019. "Regime differences and industry heterogeneity of the volatility transmission from the energy price to the PPI," Energy, Elsevier, vol. 176(C), pages 900-916.
    15. Sidaoui José Julián & Capistrán Carlos & Chiquiar Daniel & Ramos Francia Manuel, 2009. "A Note on the Predictive Content of PPI over CPI Inflation: The Case of Mexico," Working Papers 2009-14, Banco de México.
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    17. Gibson, Heather D. & Lazaretou, Sophia, 2001. "Leading inflation indicators for Greece," Economic Modelling, Elsevier, vol. 18(3), pages 325-348, August.
    18. 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.
    19. Yusuf V. Topuz & Hassan Yazdifar & Sunil Sahadev, 2018. "The relation between the producer and consumer price indices: a two-country study," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 17(3), pages 122-130, June.
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