The transmission channel of rising prices
The high levels of inflation around the world continue to be puzzling. We present here the dynamics of producer prices (PPI) and that of consumer prices (CPI). We have intentionally kept the same scale on the y-axis for comparison between countries. It is interesting to note the strong transmission of production costs to consumers in the United States while it is extremely weak in Japan.
On the European continent, and particularly in the United Kingdom, there is low volatility in consumer prices despite high volatility in producer prices. There is like a damping effect.
The table below quantifies the relationship between the two series. We calculated the correlation by dividing the period into two sub-periods: before 2016 and since 2016. The correlation rose in the United States but collapsed in Japan. Here’s one more conundrum for economists …
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