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Linkage between consumer price index and purchasing power parity: Theoretic and empirical study

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  • Menggen Chen
  • Xuemei Hu

Abstract

Price measurement is always important in the economic analysis. Both the consumer price index (CPI) and purchasing power parity (PPP) belong to the scope of price statistics, and the former is a temporal price index, while the latter is a spatial price index. Consumer price survey accounts for more than 70% in the coverage of the international comparison program (ICP), constituting the main part of the catalog of ICP specifications. The similar calculation method, data investigation, and compilation process also suggest that there should be an intrinsic linkage between CPI and PPP. On this basis, an approximate quantity equation is derived for them in terms of price measurement. The empirical analysis with a sample of 178 economies ranging from 2000 to 2013 found that the CPI and PPP are positive correlated significantly, and there is a long-term equilibrium relationship between them. In short run, the CPI may lead to a deviation from the equilibrium state of PPP, but the error correction mechanism makes this deviation come back gradually. Meanwhile, PPP has a price pass-through effect on CPI. The inherent relationship between CPI and PPP provides support for the integration of the CPI statistical system and the global ICP project.

Suggested Citation

  • Menggen Chen & Xuemei Hu, 2018. "Linkage between consumer price index and purchasing power parity: Theoretic and empirical study," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 27(7), pages 729-760, October.
    • Handle: RePEc:taf:jitecd:v:27:y:2018:i:7:p:729-760
    DOI: 10.1080/09638199.2018.1430164
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    Cited by:

    1. Marc Audi & Amjad Ali, 2023. "The Role of Environmental Conditions and Purchasing Power Parity in Determining Quality of Life among Big Asian Cities," International Journal of Energy Economics and Policy, Econjournals, vol. 13(3), pages 292-305, May.
    2. Menggen Chen, 2022. "Engel’s law in China: Some new evidence," Review of Development Economics, Wiley Blackwell, vol. 26(3), pages 1640-1662, August.
    3. Menggen Chen, 2021. "Sub-National PPPs Based on House and Real Income Disparity across China: a Distinctive Spatial Deflator," The Journal of Real Estate Finance and Economics, Springer, vol. 62(2), pages 187-219, February.
    4. S. M. Woahid Murad & Mohammad Amzad Hossain, 2018. "The ASEAN experience of the purchasing power parity theory," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-10, December.

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