Relationship between CPI and PPI Inflation in Iran: Does Inflation Anchored by Liquidity Growth or Exchange Rate Growth?

This study examines how exchange rate growth and liquidity growth impact the relationship between consumer price index “cpi” inflation and producer price index “ppi” inflation in iran from 2005 to 2023, using monthly data. we employ continuous wavelet transformation to capture the dynamic relationship between cpi and ppi across different frequency bands. additionally, we use a vector auto-regressive with exogenous variables model to validate our findings and utilized the granger causality test. in this study, cpi and ppi indices are divided into three categories: cpi and ppi of goods, cpi and ppi of services, and total cpi and ppi, which is the weighted mean of the two priors. our models are applied separately to each category of cpi and ppi inflation. the results indicate that the relationship between cpi inflation and ppi inflation for goods is stronger and more reliable than for services. also, we demonstrate how liquidity growth and exchange rate growth contribute to inflation through demand-pull and cost-push mechanisms, respectively. finally, we highlighted that this relationship is more dependent on exchange rate growth than liquidity growth, particularly in recent years. this indicates that inflation in iran during the studied period is predominantly driven by cost-push factors rather than demand-pull forces.