Linkage between consumer price index and purchasing power parity: Theoretic and empirical study

Menggen Chen and Xuemei Hu

The Journal of International Trade & Economic Development, 2018, vol. 27, issue 7, 729-760

Abstract: Price measurement is always important in the economic analysis. Both the consumer price index (CPI) and purchasing power parity (PPP) belong to the scope of price statistics, and the former is a temporal price index, while the latter is a spatial price index. Consumer price survey accounts for more than 70% in the coverage of the international comparison program (ICP), constituting the main part of the catalog of ICP specifications. The similar calculation method, data investigation, and compilation process also suggest that there should be an intrinsic linkage between CPI and PPP. On this basis, an approximate quantity equation is derived for them in terms of price measurement. The empirical analysis with a sample of 178 economies ranging from 2000 to 2013 found that the CPI and PPP are positive correlated significantly, and there is a long-term equilibrium relationship between them. In short run, the CPI may lead to a deviation from the equilibrium state of PPP, but the error correction mechanism makes this deviation come back gradually. Meanwhile, PPP has a price pass-through effect on CPI. The inherent relationship between CPI and PPP provides support for the integration of the CPI statistical system and the global ICP project.

Date: 2018
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DOI: 10.1080/09638199.2018.1430164

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