Exploring the relationship between producer price index and consumer price index in South Africa

Abstract

This paper investigates the relationship between consumer price index and producer price index in South Africa using correlation analysis, regression analysis and scatter plot using the data for the period 1970-2012. A number of studies have been conducted in different countries that have adopted inflation targeting as a monetary policy framework. The analysis of the scatter plot showed visually with the straight line that there is a linear relationship between Producer Price Index (PPI) and Consumer Price Index (CPI), and the correlation coefficient attested that there is a strong positive linear relationship between PPI and CPl. This implied that when there is a (positive or negative) change in the producer price there will also be a positive change in the consumer price index which doesn't automatically mean change in consumer prices will change producer prices. The model was also significant with p (price) value less than 0.05 which concluded that the model fits the data very well. In other words the PPI explains a significant amount of variability of the CPl. Regression analysis was also performed to assess the significance of the PPI in explaining the variability or behaviour of CPl. From the data used it showed that an increase of one unit for PPI amounts to a 0.46 increase in CPl.