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Transmission of Producer Prices Through Stages of Processing

Tae-Hwy Lee and Stuart Scott


An economy can be subdivided sequentially into several stages, and producer price indexes (PPI) can be developed for each stage. The U. S. Bureau of Labor Statistics has developed two such formulations: one emphasizing the degree of a product's fabrication and another the direction of transactions among stages. Tracing the inflation transmission in terms of timing, direction, and magnitude is then possible. Inflation transmission is examined and compared in the two PPI systems using vector error correction models (VECM). The relationships between the long-run and short-run factors are explored to learn the dynamic structure of each price system. Forecasts of CPI inflation using the two PPI systems are also evaluated.