Does Producer Price Index Lead Consumer Price Index?

Many Iranian economists believe that producer price index (PPI) inflation lead consumer price index (CPI) inflation. Based on this hypothesis, increasing (decreasing) in PPI inflation is a signal for future increasing (decreasing) in CPI inflation. Using CPI and PPI sub components, this paper tests the abovementioned hypothesis. 359 sub components of consumer basket and 751 sub components of producer basket during 1383 to 1392 are information used in calculations. The results show that PPI inflation does not lead CPI inflation, but by eliminating the common sub components between CPI and PPI from PPI components and reconstructing PPI, we see that reconstructed PPI inflation can lead CPI inflation both in long and short run.