The Relationship Between Consumer and Producer Price Indices in Turkey: Structural Break and ARDL Bounds Test

Inflation is an important and multi-faceted variable which was used in a lot of empirical studies. In these studies either CPI or PPI is used as a proxy for inflation level. But, if it is the case that CPI and PPI are not related the outcomes of this choice may differ. So, in order to be able to substitute these two indicators it is necessary that they are positively related. For many countries, the relationship between CPI and PPI has been examined and somewhat conflicting evidence yielded. In this study, the relationship between CPI (Consumer Price Index) and PPI (Producer Price Index) were investigated during the period 1994: 01-2009:12 by using bounds test in the case of Turkey. The results have shown that there is one-directional causality relation PPI to CPI. This result was also denoted that inflation in Turkey is affected by cost of production in short and long term.