Nonlinear relationship Between CPI and PPI in UK, France, Germany and Spain

Abstract

This paper examines the dynamic relationship between the consumer price index (CPI) and the producer price index (PPI) in the UK, France and Germany from 1997 to 2012. We employ the momentum-threshold autoregressive (MTAR) Cointegration model for empirical analysis. The results show that the CPI and the PPI are cointegrated with long-run and short-run Granger causality between CPI and PPI, signifying the existence of demand-pull and the cost-push nature of inflation. The estimates of threshold vector error correction models (TVECMs) indicate asymmetric adjustment to equilibrium. The reversion to equilibrium is faster when CPI inflation increases relative to PPI inflation than otherwise in all of the countries under study, where anticompetitive behavior may exist in the input markets. Moreover, we generate the unconditional half-life estimates as a measure of persistence, which reveal robust evidence of complex nonlinearities in the adjustment process. Our overall results provide insight for researchers and policymakers to address inflation-control policies in a nonlinear framework.