Modelling the Relationship between Whole Sale Price and Consumer Price Indices: Cointegration and Causality Analysis for India

Abstract

In this study we attempted to analyze the static and dynamic causality between producers' prices measured by WPI and consumers' prices measured by CPI in the context of India. We did our analysis in the framework of time series and for analysis, we applied ARDL bounds testing approach to cointegration and robustness of ARDL approach is examined through Johansen and Juselius (1990) maximum likelihood approach over the period of 1950-2009. We found the evidence of bidirectional causality between WPI and CPI in both cases i.e., in the short-run and long-run. Furthermore, outside sample forecast analysis reveals that in India, WPI leads CPI. This implies that WPI is determined by market forces and also a leading indicator of consumers' prices and inflation. This gives an indication to the Indian policy analysts to control for factors affecting WPI in order to have control on CPI since CPI is used for indexation purposes for many wage and salary earners including government employees and hence it will be helpful in cutting down the excess government expenditure.

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).…”

Human Capital Outflow and Economic Misery: Fresh Evidence for Pakistan

“…There is no problem of autoregressive conditional heteroskedisticity and short run model is well constructed 2 . There are numerous causality approaches available in existing applied economics literature and most widely used is the vector error correction method (VECM) Granger causality to examine long run and short run causality relationship between the variables (Tiwari and Shahbaz, 2013). The main demerit with the VECM Granger causality is that it only captures the relative strength of causality within a sample period and cannot explain anything out of the selected time period.…”

Measures of Inflation in India

“…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.…”