On the wedge between the PPI and CPI inflation indicators

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2022-5

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Monetary Policy ; Central Banks and Their Policies ; Neoclassical Models of Trade ; Models of Trade with Imperfect Competition and Scale Economies; Fragmentation ; Open Economy Macroeconomics ; Economic Impacts of Globalization: Macroeconomic Impacts
• Subject: Inflation and prices ; Inflation targets ; International topics ; Monetary policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Wei, Shang-jin ; Xie, Yinxi
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2022

Further information

• DOI: doi:10.34989/swp-2022-5
• Handle: http://hdl.handle.net/10419/261258
• Last update: 10.03.2025, 11:45 AM CET