INFLATION AND THE DISTRIBUTION OF PRICE CHANGES ACROSS MARKETS: A CAUSAL ANALYSIS

Recent advances in time series methodology are applied to the investigation of causal relationships between monthly changes in the consumer price index and changes in its dispersion across different consumption categories. This dispersion is associated with the degree to which relative prices are changing. Past inflation rates seem useful in forecasting changes in relative prices, but not vice-versa; there is also a significant contemporaneous correlation between these series. Hence, it is concluded that fluctuations in the inflation rate help cause fluctuations in relative prices, but not vice-versa unless the entire effect occurs within a month. The analysis also serves to illustrate a new way to implement the Granger causality concept.