This article explores the nature of the existing relationship between the Producer Price Index (PPI) and the Consumer Price Index (CPI). In particular, it seeks to determine whether the PPI can be considered a leading indicator of the CPI, using the methodology of coincident profiles proposed by Martinez (2010), which modifies the one presented by Banerji (1999). Previous studies for Colombia and other countries found links of all types between these two price indexes. Yet, there is no evidence of previous studies that have eliminated the methodological differences between the two baskets, at least in the international literature reviewed for this article. However, when these discrepancies are removed (homogenization of items and weights), desirable results are found for the Colombian case; namely, the PPI leads the CPI and, depending on the analyzed group, this leadership might anticipate evolution of the CPI by one month or even more. These findings clearly are useful as input to improve consumer inflation forecasting models and the monetary authority's decision-making process.
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