Page 59 - Azerbaijan State University of Economics

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

RESULTS AND DISCUSSION
This section presents the results for wavelet coherence analysis. Figure 2 reports the
relationships between different pairs of producer and consumer prices over time-
frequency domain.

Figure 2a displays the wavelet coherence between annual change of producer prices
and annual consumer inflation. There is some relationship over the medium frequency
(about 8-12 months) from 2005 to 2010. The co-movement in that period is intiutive,
because the period coincides with the high oil price cycle and a dramatic increase in
government expenditures which ultimately accelerated inflation rates during the years
from 2006 to 2008. Another noteworthy point here is that producer prices lead the
consumer inflation. Since 2010 no significant relationship is recorded between the
variables. The weak relationship can be explained by the significant share of mining
and quarrying sector in aggregate PPI. Similar results were also reached by Islam and
Kulkayeva (2022). To deal the issue, I use annual change in manufacturing producer
prices and check its co-movement with the annual consumer inflation (Figure 2b).
This analysis also shows that the two series move together during 2007-2010.
However, there was no sign of lead-lag relationship over that period. It can be
attributed to the fact that manufacturing non-food sector has lower share in aggregate
consumer price, as the share of imported non-food products are high in consumer
basket.

I further check the possibility of the relationship between other sectoral levels of the
price indices. Figure 2c illustrates the relationship between manufacturing producer
prices and non-food consumer prices. The figure suggests that in early periods of the
study period, there was leading positive relationship in long-term horizons. This
relationship is observed in medium term horizons during 2008-2010. In later periods,
no significant relationship is recorded. Later in 2015-2016, the non-food consumer
inflation leads the manufacturing producer prices.

Figure 2d indicates a strong association between food producer prices and food
consumer inflation where the wavelet coherency is close to one. As it is visible, the
series are in phase over the whole study period. Particularly, the series move together
at the 16-32 months period over the years from 2007 to 2009. In terms of lead-lag
relationship, food PPI leads the CPI. After 2011, the leading patterns of food producer
prices disappears and again starting from 2017, the food producer prices lead
consumer prices at lower frequencies. This effect is attributable to relatively higher
share of locally produced food products in the consumption basket. It is also
confirmed by Figure 2e where the co-movement between food producer prices and
food consumer inflation demonstrates similar pattern.

59