On the Wedge Between the PPI and CPI Inflation Indicators

Shang-Jin Wei and Yinxi Xie ()

Staff Working Papers from Bank of Canada

Abstract: While two strands of the literature suggest that PPI inflation, in addition to or instead of CPI inflation, should be a targeting variable in a monetary policy rule, the distinction between the two is only important when they do not co-move strongly. Our first contribution is to document that their correlation has indeed fallen substantially since the start of this century. Our second contribution is to propose a model to understand this divergence based on expanding global supply chains. Our theory produces additional predictions that are also confirmed in the data. As such changes are structural rather than temporary, the standard monetary policy rule that does not target the PPI inflation may have become increasingly problematic.

Keywords: Inflation and prices; Inflation targets; International topics; Monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F11 F12 F41 F62 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2022-01
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:22-5

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