Annex 1

The Relationship between CPI-Combined and WPI

The relationship between WPI and CPI was examined based on monthly data from January 2000 to December 2013, for Food and Core (non-food non-fuel) parts separately.

For this, the variables were initially seasonally adjusted using X-12-ARIMA technique. The inter-relationship was tested using Granger Causality and SVAR framework. First difference of the log of seasonally adjusted data was used.

Figures in parentheses are p-values. The optimum lag length is 2.

Conclusion: Impact of an increase in WPI-food inflation on CPI-Combined food inflation is significant and leads to increase in CPI-Combined food till two months, while an increase in CPI-Combined food inflation leads to a corresponding increase in WPI-food inflation.

B. Investigating the relationship between CPI-Combined Core and WPI-Core

Here core is defined as headline CPI/WPI excluding Food & Fuel.

Figures in parentheses are p-values. The optimum lag length is 3.

Conclusion: No significant impact of WPI-Core on CPI-Combined Core and vice versa.