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Empirical Analysis of Price Indices in India

CPI to WPI Causation

The causal relationship between consumer price index and wholesale price index has been the focus of several econometric studies. The CPI could drive the WPI when producers follow mark-up pricing and when wages increase. These could be due to supply shocks that lead producers to hike prices, thereby also increasing consumer prices, which in turn could lead trade unions to demand higher wages--leading to higher WPI. Alternately if consumer expenditure rises in response to a positive income shock--increasing the demand for goods--it can lead to a rise in the derived demand for labour and subsequently wages. The present study attempts to (i) empirically test for the causal influence of CPI on WPI in the frequency domain, and (ii) test whether the observed CPI to WPI causation is demand-driven or driven by supply shocks.

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