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Date : 21 Jan 2014
Investigating the Relationship Between CPI-Combined and WPI

Annex 1

The Relationship between CPI-Combined and WPI

The relationship between WPI and CPI was examined based on monthly data from January 2000 to December 2013, for Food and Core (non-food non-fuel) parts separately.

For this, the variables were initially seasonally adjusted using X-12-ARIMA technique. The inter-relationship was tested using Granger Causality and SVAR framework. First difference of the log of seasonally adjusted data was used.

A. Investigating the relationship between CPI-Combined Food and WPI-Food

Dependent variable

Independent variable

Test statistic

Remark

Dlog(WPI_food)

Dlog(CPI_food)

9.62

Bidirectional causality

(0.02)

Dlog(CPI_food)

Dlog(WPI_food)

8.58

(0.04)

Figures in parentheses are p-values. The optimum lag length is 2.

C31

Conclusion: Impact of an increase in WPI-food inflation on CPI-Combined food inflation is significant and leads to increase in CPI-Combined food till two months, while an increase in CPI-Combined food inflation leads to a corresponding increase in WPI-food inflation.

B. Investigating the relationship between CPI-Combined Core and WPI-Core

Here core is defined as headline CPI/WPI excluding Food & Fuel.

Dependent variable

Independent variable

Test statistic

Remark

Dlog(WPI_Core)

Dlog(CPI_Core)

3.29

No evidence of existence of causality between WPI-Core and CPI-Core.

(0.35)

Dlog(CPI_Core)

Dlog(WPI_Core)

3.23

(0.36)

Figures in parentheses are p-values. The optimum lag length is 3.

C32

Conclusion: No significant impact of WPI-Core on CPI-Combined Core and vice versa.


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