VIII Международная студенческая научная конференция Студенческий научный форум - 2016

It goes without saying that price indexes are important determinants of economic situation in terms of inflationary processes determination. The basic aim of any price index is to represent the percentage change in overall level of prices in some particular period, which puts economists in the picture of the situation. Still, there exist many different indexes serving for this purpose, using various methods of calculation, and based on distinct types of data. Thus the results received would differ even for the same state in the same period of time. How to define, what exactly they could show then? How to explain the differences in numbers received and their correlation?

The aim of this research is to identify the role of price indexes as economic indicators and figure out the way they correlate to each other. Let us take into consideration the basic types of those indexes, such as Consumer Price Index (CPI), Producer Price Indexes (CPIs), and Gross Domestic Product (GDP) deflator. To implement the real calculations of inflation rates, using those indexes, the statistical data of the Russian Federation and Japan in 2004-2014 shall be taken. The reason for choosing Russian Federation and Japan is that those countries face two different problems with price levels: Russia has to deal with relatively high inflation rate, and Japan’s main concern is to avoid deflation. Considering two opposite situations, the basic mechanisms linking both, inflation and deflation processes up with changes in economies can be figured out.

The variety of sources was involved in the process of creation of this paper, starting from the official documentation and finishing with the modern researches and reliable internet sources, which allow forming the relatively objective opinion on the subject of research.

1. Theoretical aspects of inflation measurement

Measuring inflation is a difficult problem for government statisticians. To do this, a number of goods that are presented in the economy are put together as a market basket, the prices of which are compared over time. The calculation of averages of in such prices results in price indexes.

There are two main types of indexes that measure inflation: Consumer Price Index (CPI), and Producer Price Indexes (PPI).

Consumer Price Index: a measure of price changes in consumer goods and services, based on some specific average consumer basket (set of goods and services consumed by the average citizen of the state). It examines the average of prices weighted according to their importance. Thus the inflation rate can be calculated using the following formula:

The main disadvantage of CPI is that it is does not often change the consumer basket of goods, and thus does not take into consideration the substitution effect: if the price for some good of the basket rises, citizens would prefer to substitute it with another one, not included into the basket, but the price of which would be more preferable.¹

Producer Price Indexes: family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller.

Analogically with CPI-method, the inflation rate can be calculated using the following formula:

PPI indexes are less frequently used, but they provide more detailed information about the changes in production prices of different industries.²

GDP deflator is calculated by the following formula: . It represents the changes of prices with respect to a specific base year (as follows from the definition of the Real GDP). The GDP deflator of the base year itself is equal to 100%. The main advantage of this method is that, unlike CPI, it does not require fixed basket of goods and services.³

2. Computation of indexes in the Russian Federation and Japan (2004-2014)

2.1 Russian Federation

According to recent data, Russian Federation takes the 10^th position in worldwide GDP-ranking (1.86 billion current international dollars), 50^th position in worldwide GDP-per-capita ranking, and 176^th position by worldwide real-GDP-growth ranking.⁴

The change of real GDP growth in period of 2004-2014 is graphically represented by the Figure 1 (watch Appendix)⁵.

2.1.1 CPI and PPI

Using data for Russian Federation’s Consumer Product Index, we can provide calculation of inflation rate by implementation of the formula, described in the theoretical part. Initial data (for December 31 of each year) and results of calculations are represented in the Table 1⁶.

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
CPI	185.9	206.2	224.8	251.5	284.9	310	337.2	357.8	381.2	405.9	452
Inflation Rate	-	10.9%	9%	11.9%	13.3%	8.8%	8.8%	6.1%	6.5%	6.5%	11.4%

Table 1

Russian Federation’s Producer Price Index measures the average change in price of goods and services sold by manufacturers and producers in the wholesale market during a given period. Using data for PPI, we can provide calculations of inflation rate by the way analogical to CPI-approach.

Initial data (for December 31 of each year) and results of calculations are represented in the Table 2⁷.

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
PPI	205.7	233.2	257.4	321.9	299.4	340,8	397.6	445.4	468.3	485.5	513,9
Inflation Rate	-	13.4%	10,4%	25.1%	-7%	13.8%	16.7%	12%	5.1%	3.7%	5.8%

Table 2

2.1.2 GDP Deflator

To calculate inflation rate basing on GDP deflator (applying for the same principle as in cases of CPI and PPI), we take data for the GDP deflator of the Russian Federation in the fourth quarter of each year (approximately, the data of the end of December). Third quarter of 2008 is considered as the ‘base year’ data (that is why there is no 100 figure in the table – data for 2008 is all about the fourth quarter, not the third one). Initial data and the results of calculations are represented in the Table 3⁸

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
GDP defl.	58.62	68.49	75.56	90.63	99.55	104,09	119.5	135.43	148.79	155.64	165,98
Inflation Rate	-	16.8%	10,3%	19.9%	9.8%	4.6%	14.8%	13.3%	9.9%	4.6%	6.7%

Table 3

2.2 Japan

According to recent data, Japan takes the 3^rd position in worldwide GDP-ranking (4.6 billion current international dollars), 25^th position in worldwide GDP-per-capita ranking, and 156^th position by worldwide real-GDP-growth ranking.⁹

The change of real GDP growth in period of 2004-2014 is graphically represented by the Figure 2¹⁰ (watch Appendix).

2.2.1 CPI and PPI

Using data for Japanese Consumer Product Index, we can provide calculation of inflation rate by implementation of the formula, described in the theoretical part. Initial data (for December 31 of each year) and results of calculations are represented in the Table 5 ¹¹.

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
CPI	100.7	100.3	100.6	101.3	101.7	100.0	99.60	99.40	99.30	100.9	103.3
Inflation Rate	-	-0.4%	0,3%	0.7%	0.4%	-1.7%	-0.4%	-0.2%	-0.1%	1.6%	2.4%

Table 4

Japanese Producer Price Index measures the average change in price of goods and services sold by manufacturers and producers in the wholesale market during a given period. Using data for PPI, we can provide calculations of inflation rate by the way analogical to CPI-approach.

Initial data (for December 31 of each year) and results of calculations are represented in the Table 6¹².

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
PPI	96.2	98.1	99.7	102.4	103.2	99,40	100.2	101.0	100.3	102.8	104,7
Inflation Rate	-	2.0%	1,6%	2.7%	0.8%	-3.7%	0.8%	0.8%	-0.7%	2.5%	1.8%

Table 5

2.2.2 GDP Deflator

To calculate inflation rate basing on GDP deflator (applying for the same principle as in cases of CPI and PPI), we take data for the GDP deflator of the Russian Federation in the fourth quarter of each year (approximately, the data of the end of December). Third quarter of 2004 is considered as the ‘base year’ data (that is why there is no 100 figure in the table – data for 2004 is all about the fourth quarter, not the third one). Initial data and the results of calculations are represented in the Table 7¹³.

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
GDP defl.	103.1	101.5	100.8	99.40	99.40	97.10	95.10	93.70	93.00	92.70	94,90
Inflation Rate	-	-1.6%	-0,7%	-1.4%	0.0%	-2.3%	-2.1%	-1.5%	-0.7%	-0.3%	2.4%

Table 6

To simplify the analysis task, we can summarize our results in the form of the diagrams (Figures 3, 4).

Russian Federation inflation rates (YoY change in %)

 

Figure 3

 

Japan inflation rates (YoY change in %)

 

Figure 4

 

3. Analysis of the data computed

3.1 Statistical correlation of indexes

As we can observe from the results received, the numbers presented by indexes are different indeed. To some extent it seems like they show no correlation at all. To show that it is not true, let us implement mathematical approach and calculate correlation coefficients between pairs of coefficients for each country

Correlation coefficient shows the degree of dependence of values two or more variables on each other on the scale of -1 to 1. Positive correlation is determined by 1 or numbers approaching it. The closer the number calculated to 1, the stronger the positive correlation is, which would mean that the more one variable gets, the more another one gets. Negative correlation is determined by -1 or numbers approaching it. The closer the number calculated to -1, the stronger the negative correlation is, which would mean that the more one variable gets, the less another one gets. Finally, no correlation is determined by 0. Zero coefficient defines that variables are independent. Logically, the dependence of a variable on itself is determined by correlation coefficient equal 1.

The most commonly used formula for correlation coefficient calculation is the formula of Pearson product correlation coefficient, which is used to calculate the simplest linear dependence of variables. It is calculated in the following way:

To simplify the understanding, let us omit details of calculations and present the results received in the form of matrices (Tables 8,9):

Russian Federation	CPI	PPI	GDP deflator
CPI	1	0.982	0.993
PPI	0.982	1	0.993
GDP deflator	0.993	0.993	1

 

Table 8

 

Japan	CPI	PPI	GDP deflator
CPI	1	0.56	0.182
PPI	0.56	1	-0.582
GDP deflator	0.182	-0.582	1

 

Table 9

 

From the results received it can be concluded that in the Russian Federation there is a strong positive correlation between pairs of price indexes. All of them are practically directly connected to each other in their dynamics. This explains, why trends of inflation rates’ changes, calculated basing on these indexes, show the same tendencies (Figure 3).

Japanese example also shows relatively strong positive correlation between CPI and PPI 0.56). Correlation between PPI and CPI is not that strong, but still is positive (0.182). As for GDP deflator and PPI, there is surprisingly strong negative correlation (-0.582). It can be observed from the Figure 4, where inflation rates’ changes show different tendencies, and their periods of growth and fall do not coincide.

To clarify the reason for such differences and to find out the way it determines the economic situation in the state, let us compare the result with accordance to the historical economic events, which preceded them.

3.2 Economic events 2004-2014 indicated by price indexes

It shall be mentioned somehow that inflation rate is not desirable to be zero. The expectations of the future prices to grow supports the purchasing power of buyers, keeps borrowing costs low, and provides a stable background for businesses to make investment and hiring decisions. That is why developed countries use inflation targeting policies, willing to reach the optimal inflation level of 2%.

3.2.1 Russian Federation

The main feature of inflation rate in the Russian Federation is that it never decreases. The only thing that changes throughout the time period taken is the speed of change. Figure 4 does not show declines in the price indexes, but the decline in the degree of their continuous growth.

As we can observe, no matter which method of calculation is used, inflation rates in most of cases are far above the level of 2%, which means that the economy of the state has been experiencing quite strong inflationary processes. That was one of the main reasons to take Russia into consideration in this work (as it has already been mentioned in the introduction).

Analyzing Figure 4, described above, and Figure 2, representing its real GDP growth rates, we can figure out the following tendencies:

• 2005-2008 – moderate real GDP growth, relatively stable inflation rates with a change to decrease trend occurring in 2007.

• 2008-2010 – decrease in real GDP, decrease in inflation rates (we can also notice sharp decrease in price level for producer in 2008).

• 2010-2014 – back to positive real GDP growth with a tendency to slow down, decrease of inflation rates until the end of 2013, followed by sharp increase in 2014.

The period of 2005-2008 is the part of the expansion period of 2000-2008, which is known for its impressive economic growth, during which real GDP of Russia increased 6.9% on average per year. It was also reflected in other measurement that pointed to and improved Russian living standard of living throughout the period. Average real wages increased 10.5% per year. In addition, real disposable income grew 7.9% from 1999 to 2008. The Russian unemployment rate also declined during the period from 12.6% to 6.3%.¹⁴

That was the reason for gradual increase of all the price indexes, which represented relatively synchronic movement. To some extent, the synchronic movement of price indexes is the result of continuous processes with no rapid changes for a quite significant period of time. As for the inflation rates, those kept growing, but the expansionary processes seem to slow them down, representing the change of the economic situation for the better.

The period of 2008-2010 is well known as the Financial Crisis. In Russia it occurred later that in other world – practically at the end of 2008, and its consequences were especially clearly observed in 2009. As the Figure 12 shows, recovery period started in 2010 and finished by 2011. But such a rapid growth of nominal GDP may be overestimated because of the inflation (8.8% in 2009-2010) If we look back at the Figure 2, representing real GDP growth, numbers would not be that impressive, but the time framework remains the same. While the global recovery weakened, Russia’s growth remained resilient and its output returned to pre-crisis level.¹⁵

The year 2008 is the point at which inflation rates calculated using different indexes start to behave asynchronously. Obviously, the most rapid change is represented by the PPI index. It was the first to decrease rapidly, and also was the one which ‘recovered’ first. The explanation for such a difference is simple: producers are the ones who react first to economic changes. When the General Crisis of 2008 arrived in Russia, producers were no longer able to keep getting cheap foreign credits, the volumes of exports significantly decreased. That was the reason for the decrease of levels of prices (as the result of the production’s slow down), causing the rapid decrease of PPI and negative inflation rate, calculated on its basis, and indicating recessionary processes.

Why did CPI not follow that rapid decrease then? The main reason is that prices for producers do not directly influence prices for consumers. Different technologies and restructuring features may result in smothering the financial problems of producers from the point of view of customers. Sharp increase in the production costs may be compensated by the reduction of staff or technology improvement, resulting in the smaller change in the level of prices of the real product. That is why PPI usually exceeds CPI by the rate of change. And that is why we may say that this index is more sensitive to economic fluctuations.

As for GDP deflator, following the same logic, its rate of change is even smaller than for CPI and PPI. That is the reason why inflation rate calculated on its basis does not show rapid changes and usually follows trends presented by CPI and PPI with a delay of 2-3 years. That means that the economic fluctuations of 2008 are reflected in the change of GDP deflator in 2010-2011, showing more global and deep circumstances of the Crisis.

The last question is why all those indexes according to the numbers of correlation coefficients, calculated earlier, show such a strong positive interdependence. To my mind, the main reason for this is the continuous inflationary process. During the period pf 2004-2014 in Russia, as it has already been mentioned, prices in general never stopped growing. Even in the period of Crisis the inflation rates according to CPI index and GDP deflator were positive. The continuous process of prices’ growth resulted in the continuous growth of all the indexes. That is why the correlation among them is positive.

3.2.2 Japan

Analyzing Figure 5, which sums up all the price indexes’ changes, and Figure 3, which considers real GDP growth of Japan, we can figure out the following trends:

• 2005-2008 – stable, but relatively small economic growth, accompanied by very low inflation rates.

• 2008-2009 – sharp decrease in real GDP, occurrence of deflation (all the price indexes’ growth rates fell below zero).

• 2009-2014 – coming back to the positive growth rates, quit the deflation process only in 2012

Generally speaking, the period of 2004-2008 was relatively insignificant in terms of its increase in real GDP, because the problematic long-term economic downturn started long before that. It is so-called Lost Decade: time after Japanese asset price bubble’s collapse. Recently, many economists prefer to call it Lost 20 Years, including the period of 2000-2010 either (despite the relatively successful recovery from the Crisis 2008-2009). ¹⁶

Deflationary processes started in Japan in the early 1990s, caused by the following reasons:

• Fallen asset prices because of Price-bubble collapse.

• Insolvent companies: decrease in real estate values led to many loans unpaid, turning them into ‘unrealized loss’. Until the assets are completely revalued and/or sold off, it will remain being a deflationary force in the economy.

• Insolvent banks: banks which carry debts unpaid by the borrowers.

• Fear of insolvent banks: Japanese people are afraid of banking system collapse and thus prefer not to save their money in a bank account.

The global economic recession significantly harmed Japan in 2009, causing even more severe decline in real GDP growth rates and strengthening deflationary processes. The nation suffered a 0.7% loss in real GDP in 2008, followed by even worse 5.2% loss in real GDP in 2009. Again, likewise in case of the Russian Federation, the most significant reaction to those fluctuations was shown by PPI: inflation rates calculated on its basis were the higher than others in the period before the Crisis, and dropped to the lowest positions in 2008-2009.

Another disaster affecting Japan was earthquake and tsunamiof 2011. The main concern at that time was that the public debt, at about 200% of GDP, could have become so high, that borrowing to finance reconstruction could cause a confidence loss in the ability of the Japanese government to repay its debts.¹⁷ In this period we consider relatively significant increase in all the price indexes and thus with the inflationary rates, connected with foreign debts and government transfers directed to compensate the consequences of the catastrophe.

Why then in 2012 the inflation rates started to grow back to the positive numbers? In 2012 Japanese Premier Shinzo Abe introduces so-called Abenomics concept. This involved the Bank of Japan printing money to buy government bonds in the hope of kindling inflation. This was twinned with an increase in the Bank of Japan’s inflation target from 1% to 2%. As we can conclude from the Figure 5, this course was quite successful, kindling inflation rates, and thus rising up all the price indexes above the zero points.

The reason for the positive correlation between CPI and both PPI and GDP deflator is reasonable, as the more PPI gets, the more CPI is, and the same is for CPI and GDP deflator. Why then there is a negative correlation between GDP deflator and PPI? The reason is explainable with accordance to the economic events described above. The point is that because of continuous deflationary processes the levels of prices for producers both increased and decreased during the period, meanwhile GDP deflator’s changes remained smooth (because of the reasons familiar to those described for the Russian case). That is why in some periods a decrease in PPI was not followed by the GDP deflator, seemingly showing the negative correlation (the less PPI got, the more GDP deflator was). That is the reason for the negative correlation coefficient, presented in the table of calculations.

CONSLUSION

To sum everything up, I should stress that last decade was quite eventful in terms of international economic shocks. That was the main reason for choosing this period of time with a view to show the interdependence of different financial indexes of two states.

Recent trends and the upcoming Financial Crisis of 2014-2015 were not taken into consideration because of the complexity and non-determinability of the situation, requiring more detailed and complex research. It would not have been enough to provide only the analysis of Price indexes and GDP changes to give a full picture of the current situation, thus I chose earlies period of time to answer the main question of my work.

Generally speaking, examples of the Russian Federation and Japan represent the close interconnection between changes in the economic performance of the state and its levels of prices. As we can observe, those changes clearly clarify the business cycle stages of the long-term economic growth of the countries, following relatively close algorithm. Co-incidences in the stages of business cycles of Russian and Japan define the global correlation among the states (as we can conclude from the example of the recession processes occurrence in both states). The essential difference to be underlined is that different policies and historical development of economies define different courses of the following development. Thus two different states have to face absolutely different problems in the face of the same world-wide economic recession (deflationary processes in Japan and inflation in Russian Federation).

Analyzing and summarizing the data considered above, we can figure out the following tendencies in indexes’ correlations:

• Producer price index usually exceeds consumer price index by the rate of change. We can conclude that it is moresensitive to the changes in the market (producers are the first who face changes in prices and deal with them).

• In general, CPI and PPI’s trends tend to coincide.

• On the contrary, GDP deflator shows less rapid changes, and thus it is less sensitive to the changes in the market.

• In general, GDP deflator follows CPI and PPI trends with a delay of 2-3 years. This could mean that it represents more global results of changes in the market, determined by CPI and PPI and occurring a few years later (it is especially obvious in case of Russian indexes, Figure 3).

The features mentioned above, to my mind, explain to some extent why CPI is considered to be the most-frequently used price index for the inflation rate calculation. PPI shows too rapid reaction, which may not later on result in significant changes of the economy’s performance. As for GDP Deflator, situation is quite opposite: from its changes we can consider global changes of price level in the economy, occurring significantly later after their basic reasons occurred. Finally, the main task of the economic growth and successful performance of the economy is to improve its citizens’ welfare. Thus the changes in prices for consumers tend to be one of the main determinants of the current economic performance.

REFERENCES

1. “BLS Information” Glossary – U.S. Bureau of Labor Statistics Division of Information Services (29 February 2008).

2. A Note on the Origins of Index Numbers – Chance W.A., The Review of Economics and Statistics (February, 1966).

3. Bloomberg Business News, Social Security Administration

4. Concepts and methods of the U.S. National Income and Product Account – Bureau of Economic Analysis (July 2008).

5. Index Numbers – Diewer W.E., Essays in Index Number Theory (1993).

6. Inflation Targeting: Holding the Line – International Monetary Funds, Finance & Development (28 December, 2014).

7. Japan Eyes End to Decades Long Deflation – Leika Khara (August 2012).

8. Japanese Economy 2005: Prospects for Continuous Recovery and Risks – Directorate General for Economic Research (December 2005).

9. Macroeconomics, 3rd edition – Paul Krugman, Robin Wells (2011).

10. Measuring the Economy: the Primer on GDP and the National Income and Product Accounts – Bureau of Economic Analysis U.S. Department of Commerce (October, 2014).

11. Russia’s Economic Performance and Policies and Their Implications for the U.S. – William H. Cooper, Congressional Research Service (June, 2009).

12. Russian Economic Report: Moderating Risks, Bolstering Growth – The World Bank in Russia (2012)

13. S&P. Downgrades Japan as Debt Concerns Spread – Hiroko Tabuchi and Bettina Wassener, The New York Times (January 2011).

14. The Economist – Volume 387, May 31 (June 6, 2009).

15. Trading Economies Database// Internet-source http://tradingeconomics.com/japan/gdp-deflator

16. Trading Economies Database// Internet-source http://tradingeconomics.com/japan/gdp-growth-annual

17. Trading Economies Database// Internet-source http://tradingeconomics.com/japan/producer-prices

18. Trading Economies Database// Internet-source http://tradingeconomics.com/russia/gdp

19. Trading Economies Database// Internet-source http://tradingeconomics.com/russia/gdp-growth-annual

20. Trading Economies Database// Internet-source http://tradingeconomics.com/japan/consumer-price-index-cpi

21. Trading Economies Database// Internet-source http://tradingeconomics.com/russia/consumer-price-index-cpi

22. Trading Economies Database// Internet-source http://www.tradingeconomics.com/russia/gdp-deflator

23. Trading Economies Database// Internet-source http://www.tradingeconomics.com/russia/producer-prices

24. Why Price Stability? – Central Bank of Iceland, Accessed on September 11, 2008.

25. World Economic Outlook Database – International Monetary Fund (2014-2015).

Appendix

Figure 2: Real GDP Growth of Russian Federation (%)

Figure 3: Real GDP growth of Japan (%)

1^ Bloomberg Business News, Social Security Administration

2^ The Economist – Volume 387, May 31 (June 6, 2009)

3^ Concepts and methods of the U.S. National Income and Product Account – Bureau of Economic Analysis (July 2008).

4^ World Economic Outlook Database – International Monetary Fund (2014).

5^ http://tradingeconomics.com/russia/gdp-growth-annual

6^ http://tradingeconomics.com/russia/consumer-price-index-cpi

7^ http://www.tradingeconomics.com/russia/producer-prices

8^ http://www.tradingeconomics.com/russia/gdp-deflator

9^ World Economic Outlook Database – International Monetary Fund (2014-2015).

10^ http://tradingeconomics.com/japan/gdp-growth-annual

11^ http://tradingeconomics.com/japan/consumer-price-index-cpi

12^ http://tradingeconomics.com/japan/producer-prices

13^ http://tradingeconomics.com/japan/gdp-deflator

14^ Russia’s Economic Performance and Policies and Their Implications for the U.S. – William H. Cooper, Congressional Research Service (June, 2009).

15 ^ Russian Economic Report: Moderating Risks, Bolstering Growth – The World Bank in Russia (2012)

16^ Japan Eyes End to Decades Long Deflation – Leika Khara (August 2012).

17^ S&P. Downgrades Japan as Debt Concerns Spread – Hiroko Tabuchi and Bettina Wassener, The New York Times (January 2011).

16

Код для цитирования: Скопировать