Revisit the relationship between two inflation indicators: Case of Pakistan

Abstract

This research paper determines the association between two inflation indicators, consumer price index and wholesale price index in three groups' i.e. general group, food group, and non-food group. The objective is to f ind out if the relationship is unidirectional or bidirectional between CPI and WPI in all groups. For this purpose monthly data from July 1971 to December 2019 has been used. Furthermore, Cointegration has been calculated via Johansen's cointegration test on time series data to discover if the long-run aff iliation occurs between the variables. Before cointegration, it is essential to discover the stationarity of the variables for which the augmented dickey fuller test has been used at the f irst difference. Vector Error Correction Model (VECM) is also employed to check for the disturbances of divergence or convergence f inally Granger causality/Block exogenity test is applied to discover causality between variables, it also specifies unidirectional relationship or bidirectional relationship. As a result, it is found that there is a signif icant co-integration equation which indicates that there is an existence of long-run association amongst variables. On the other hand, there is also an indication of the short-run relationship among variables. Finally, a two-way causal relationship is indicated by the granger causality test, between CPI and WPI in general and food group and one-way causal association between CPI and WPI in the non-food group.