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

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  • Williams Corey J. M.

    (Department of Economics, 225 DHC, Shippensburg University, Shippensburg, PA 17257, United States)

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.

Suggested Citation

  • Williams Corey J. M., 2023. "Unraveling Producer Price Inflation Pass-Through: Quantification, Structural Breaks, and Causal Direction," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 17(1), pages 1-16, January.
    • Handle: RePEc:bpj:econoa:v:17:y:2023:i:1:p:16:n:1
    DOI: 10.1515/econ-2022-0057
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D2 - Microeconomics - - Production and Organizations
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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