A PANIC analysis on regional and sectoral inflation: the Spanish case

Abstract

This article studies the stochastic properties of several inflation rates for the Spanish economy using the consumer price index (CPI) for the 17 regions and 12 groups of goods and services, and the producer price index (PPI) for 26 industrial sectors. To this end, we employ the panel analysis of nonstationarity in idiosyncratic and common components (PANIC) approach proposed by Bai and Ng (2004, 2010). This methodology enables us to decompose the observed inflation rate series into a common and an idiosyncratic component, thus allowing us to identify the exact source of nonstationarity. Our analysis provides strong evidence of the presence of a common stochastic trend driving the observed series forming the panel of CPI-based inflation rates for the regions. This, coupled with the presence of a jointly stationary idiosyncratic component, implies the existence of pairwise cointegration across the regional CPI-based inflation rates, which show a clear pattern of convergence over time. This gives an indication of increased geographical homogeneity in consumption patterns. The evidence for the panels of CPI-based inflation of groups of goods and services and PPI-based inflation of industrial sectors indicates the existence of four independent common stochastic trends. This, combined with jointly stationary idiosyncratic series, provides much weaker evidence of cross-cointegration for these two panels.