Producer prices and inflation rate in the czech republic

Abstract

The development of industrial producer prices is commonly observed as one of the important leading indicators of consumer price inflation. Nevertheless, there was no apparent relationship between total inflation and producer prices in the Czech Republic from 1993 to 1997. This paper is an attempt to find a possible explanation of the above mentioned paradox using statistical end econometric analyses. The main idea is that the prices of industrial producers do not have a straightforward relationship to the development of prices in the entire consumer goods basket, but only to its particular subset. Indeed, the performed correlation and regression analyses did show a relation between producer prices and the corrected inflation (with a lag of 3 to 5 months), i.e. inflation net of changes in regulated prices end food prices. As a by-product, the paper also provides some support for the importance of money supply M2 and the nominal exchange rate as explanatory variables of inflation.