Policy makers have been long concerned about finding early indicators of inflation, a continuous rise in aggregate price level measured by the consumer price index (CPI). One of these indicators, which has been a target of many studies and has been supported by the production chain view, is the producer price index (PPI). The production chain view suggests that higher PPI will be passed to consumers through higher prices of finished goods. The purpose of this paper is to investigate the relationship between these two indexes using a unit root test and test of cointegration which are becoming more popular in time series analyses.



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