Page 51 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.81, # 1, 2024, pp. 51-64

RELATIONSHIP BETWEEN PPI AND CPI IN AZERBAIJAN: A

WAVELET APPROACH

Vugar Rahimov

Azerbaijan State University of Economics (UNEC),
[email protected], [email protected]
ORCID No: https://orcid.org/0000-0002-6646-8808

https://doi.org/jestp.2024.81.01.04

Received: February 02; accepted May 16, 2024; published online July 26, 2024

ABSTRACT

This paper aims to study the relationship between producer price index (PPI) and
consumer price index (CPI), as well as between components of producer prices and
components of consumer prices in Azerbaijan by using monthly data covering the
period from March 2004 to June 2023. Applying wavelet analysis approach, I find
that there is a mixed relationship between CPI and PPI, and co-movement is observed
mainly at medium and low frequencies. The results reveal that although there is a
weak co-movement between aggregate PPI and CPI, a significant and strong
relationship exists between food PPI and aggregate CPI, as well as between food PPI
and food CPI. Additionally, producer prices of agricultural products demonstrates co-
movement with consumer prices in certain periods. In terms of lead-lag relationship,
producer prices lead consumer prices. Although wavelet methodology does not
necessarily determine causality, this study provides insights for policymakers about
the direction of possible causality between producer prices and consumer prices.

Keywords: Producer Price Index, Consumer Price Index, Wavelet analysis,
agricultural products, relationship

JEL Codes: E31, E19, E39

INTRODUCTION
The primary goal of the monetary authorities in most countries is to achieve price
stability by controlling inflation. To that end, finding out the main contributors of
inflation is very important, as it allows the governments and central banks to conduct
appropriate economic policies. Producer prices, among others, is considered as one of
the main causes of consumer price inflation. Several authors have empirically
investigated the relationship between producer prices and consumer prices earlier.

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