The Wedge of the Century: Understanding a Divergence between CPI and PPI Inflation Measures / Shang-Jin Wei, Yinxi Xie.

Format:

Book

Author/Creator:

Wei, Shang-Jin.

Contributor:

National Bureau of Economic Research.

Xie, Yinxi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24319.

NBER working paper series no. w24319

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Wedge of the Century

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

Two strands of the literature suggest that PPI inflation, rather than CPI inflation, should be the targeting variable in a monetary policy rule. The distinction between these two rules would only be important if the two inflation indices do not co-move strongly. The first contribution of this paper is to document that the two inflation gauges did co-move strongly in the last century but the correlation has fallen substantially since the start of this century. The second contribution is to propose a structural explanation for this divergence based on a lengthening of world production chains since 2000. This theory implies that the decline in the correlation is likely to be permanent and a rethinking of the monetary policy rules has become more important. Our multi-stage multi-country production model has additional predictions on the behavior of CPI and PPI inflation beyond a fallen correlation, and these predictions are also confirmed in the data.

Notes:

Print version record

February 2018.