Causality between wholesale price and consumer price indices in India

Abstract

Purpose -The purpose of this study is to attempt to analyze Granger causality in the frequency domain framework between producers' prices measured by wholesale price index (WPI) and consumers' prices measured by consumer price index (CPI) in the context of India. Design/methodology/approach -Analysis was carried out in the framework of time series and for analysis Johansen and Juselius's maximum likelihood approach for cointegration was applied after confirming that variables are integrated of order one, i.e. I(1) through the Lee and Strazicich unit root test. Finally, Granger causality was tested in the frequency domain by utilizing a recently developed approach of Lemmens et al. over the period January 1957-February 2009. Findings -The paper finds that CPI Granger cause WPI at a lower, intermediate as well as higher levels of frequency, reflecting very long-run, intermediate as well as short-run cycles. By contrast WPI Granger cause CPI at 5 percent level of significance was found at intermediate frequencies, reflecting significant intermediate cycles.Research limitations/implications -The study reveals that CPI is a leading indicator of producers' prices and inflation (i.e. WPI). This gives an indication that Indian policy analysts ought to control for factors affecting CPI in order to have control on WPI since WPI is used for making various macroeconomic indicators in real terms. Originality/value -The main contribution of the paper is to show the evidence of bidirectional causality between WPI and CPI. Furthermore, use of a recent approach developed by Lemmens et al. for Granger causality in the frequency domain in this study is also relatively new. To the best of the author's knowledge there is no such study in this area either for developed or developing economy to date.

Revisit the relationship between two inflation indicators: Case of Pakistan

“…Results are presented in Table 2. Table 4 indicate the result of Johansen's co-integration test in which the trace test specify 1 co-integration equation at the significance level of 0.05 and the Max-Eigen test shows the robustness by indicating the same results therefore there is a long-term link between inflation indexes as well as between sub-indexes which is similar to the results of ,Akçay (2011), Ulke and Ergun (2014), Tiwari (2012), Colclough and Lange (1982), Shahbaz, Wahid and Haider, (2010), Shahbaz, Kumar and Iqbal, (2012), Arby & Ghauri (2016), Arshad, (2012, Mallick and Behera (2020) and Shahbaz (2013).…”

“…However Ulke and Ergun (2014) in their paper found a one-way link in the long run and causality leading to PPI from CPI while the presence of causality was not there in the short run in the case of Turkey. Tiwari (2012) finds CPI granger cause relationship in the short run, intermediate level, and long run. WPI granger causality was only found at the intermediate level.…”

The impact of monetary policy on output and inflation in India: A frequency domain analysis

“…They include Nachane and Lakshmi (2001), Sharma, Kumar, and Hatekar (2010), Tiwari (2012), and Hatekar and Patnaik (2016). Tiwari (2012), using the Lemmens et al (2008) approach, analyses the Granger causality in the frequency domain between producers' prices measured by the Wholesale Price Index (WPI), and consumer' prices measured by the Consumer Price Index (CPI), during the period January 1957 to February 2009. The study provides evidence of unidirectional causality going from CPI to WPI for business cycles of 12 months and beyond and business cycles of two or less months.…”

“…The selected lag length incorporated into the analysis was M=√� (Diebold, 2001), where 'T' is the number of observations. The study follows Sharma, Kumar, and Hatekar (2010), Tiwari (2012), and Hatekar and Patnaik (2016) in details regarding the Lemmens et al (2008) approach. The frequency domain analysis methodology (Lemmens et al 2008) was taken directly from the above-mentioned studies.…”

Measures of Inflation in India

“…Goyal and Tripathi 11 provide justification for causality between consumer and producer prices n . According to them, since consumer prices are a weighted average of the prices of domestic and imported consumption goods, and producer prices spill over into final consumer prices, wholesale price inflation should cause consumer price inflation 33,34,37 . Tiwari and Shahbaz 38 found bidirectional causality between WPI and CPI indices in India in the short-as well as the long-run.…”