Distinctive Characteristics of PPI and CPI

This study investigates the relationship between the producer price index (PPI) and consumer price index (CPI) in the Central and Eastern European (CEE) countries. The rolling window test, wavelet analysis and bootstrap panel Granger causality and System Generalized Method of Moment Regression (SGMM) methods used for estimation. The neoclassical profit-maximizing model, moderate inflation theory and expenditure switching model provide the theoretical base for this study. We find the bidirectional causality at the various sub-samples as well as causality at time and frequency domain. Similarly, the panel study concludes that various macroeconomic variables have a significant role in the formation of the causal link between the PPI and CPI. The results are useful for future policy formulation as both CPI and PPI are essential contributors to price stability and macroeconomic policies. The mutual relationship is influenced by various internal and external factors so to get precise and predicted inflation targeted policies by these economies need to have information at all stages of the value creation chain.