Dynamic Relations of Consumer Prices: A Case Study of Recent Effects on the Japanese Headline CPI

Abstract

This study attempts to empirically examine the relations between the headline consumer price index (CPI) and several other CPIs in Japan by applying the vector error correction models (VECMs). Our investigations derive the following interesting findings. First, we reveal that as to our four combinations of the CPIs tested in this paper, 1) all variable coefficients in the cointegrating equations are statistically significant in our VECM models and the statistical significance is very strong. Thus, we understand that our four bivariate combinations of the CPIs tested in this paper are all strongly cointegrated and the VECM approach is very effective to capture the time-series effects of the categorized CPIs on the Japanese headline CPI. Further, we also find that 2) as far as judging by the results of our impulse response analyses, for the period from May 2011 to June 2015, the headline CPI for Japan is weakly or little affected by the CPI of energy and the CPI of food for Japan. We further clarify that 3) according to the results of our impulse response analyses, the Japanese headline CPI is positively affected by both the CPI of utilities for Japan and the CPI of transportation and communication expenses for Japan.