Dynamics of the relation between producer and consumer price indices: A comparative analysis in the U.S. market

Abstract

The relation between the Producer Prices Index (PPI) and the Consumer Price Index (CPI) in the U.S. is analyzed for two sub-periods: one spanning from 1947 to 1982, the post-war period marked by demand-side economic policies, and the other one starting by 1983 when supply-side policies pioneered by the Reagan government came into effect. As the series in question are found to be cointegrated, a Vector Error Correction Model is employed for the analysis. Regarding the longrun equilibrium relationships, it is found that the loading for the PPI series are statistically significant for both periods, while the loading for the CPI is barely significant for the first period, and it is insignificant at any acceptable level for the second. Thus, the CPI represents the common trend in the system in both periods, but it does more clearly so in the second period.