Feedback between Wholesale and Consumer Price Inflation: A Reexamination of the Evidence

Previous studies interpret the unidirectional Granger causality from wholesale to consumer prices as evidence that final goods prices respond to exogenous cost-push factors in the primary goods sector. This paper presents a simple model that demonstrates this Granger causal pattern is also consistent with perfectly flexible prices and strong demand elements. Using the recursive structure of this model as a maintained hypothesis in estimation, the authors find negligible permanent feedback from wholesale price shocks to consumer price inflation. Instead, the evidence supports a monetary explanation of both wholesale and consumer price inflation in the long run.

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	Cushing, Matthew J Professor of Economics Expertise: Monetary Policy Public Finance Econometrics Economics CBA 352 P.O. Box 880489 University of Nebraska-Lincoln Lincoln, NE 68588-0489, USA Phone: (402) 472-2323 Fax: (402) 472-9700 mcushing1@unl.edu	Cushing, Matthew J	Economics
	McGarvey, Mary G Associate Professor of Economics Expertise: Econometrics Applied Econometrics Public Policy Analysis Economics CBA 351 P.O. Box 880489 University of Nebraska-Lincoln Lincoln, NE 68588-0489, USA Phone: (402) 472-9415 Fax: (402) 472-9700 mmcgarvey1@unl.edu	McGarvey, Mary G	Economics