Unraveling Producer Price Inflation Pass-Through: Quantification, Structural Breaks, and Causal Direction

Williams Corey J. M. ()
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Williams Corey J. M.: Department of Economics, 225 DHC, Shippensburg University, Shippensburg, PA 17257, United States

Economics - The Open-Access, Open-Assessment Journal, 2023, vol. 17, issue 1, 16

Abstract: Producer price inflation has long been considered a leading indicator for consumer price inflation. However, the evidence supporting the cost-push theory of inflation over extended periods is inconclusive and lacks direct quantification. To address this gap, we employ structural break and causality tests, regression analysis, and local projection impulse-response functions. Our analysis allows us to precisely identify instances when producer prices lead consumer prices and quantify short-run and long-run pass-through rates. We find relatively robust evidence of a producer price pass-through rate between 8 and 12%. However, there are significant periods where unidirectional pass-through does not hold. Local projections reveal that producer price pass-through is small but persistent in states where producer prices lead consumer prices, and larger but shorter-lived in states where there is no causal directionality. Our findings enhance the understanding of producer price pass-through to consumer inflation, providing valuable insights for policymakers and market participants interested in accurately forecasting and managing inflationary pressures.

Keywords: pass-through; inflation; producer prices (search for similar items in EconPapers)
JEL-codes: C33 D2 E31 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:econoa:v:17:y:2023:i:1:p:16:n:1

DOI: 10.1515/econ-2022-0057

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