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  • THE RELATIONSHIP BETWEEN CONSUMER PRICE

    INDEX (CPI) AND PRODUCER PRICE INDEX (PPI) IN

    MALAYSIA

    Linda Then Wee Mei

    Corporate Master in Business Administration 2011

  • I Pusat Khidmat Maklumat Akademik UNIVERSITI MAlAYSIA SARAWAK P.KHIDMAT MAKLUMAT AKADEMIK

    111111111 IIi'rni 111111111 1000246504

    THE RELATIONSHIP BETWEEN CONSUMER PRICE

    INDEX (CPI) AND PRODUCER PRICE INDEX (PPI) IN

    MALAYSIA

    LINDA THEN WEE MEl

    A dissertation submitted in partial fulfillment of the requirements for the degree of Corporate Master in Business Administration

    Faculty of Economics and Business

    UNIVERSITI MALAYSIA SARA W AK

    2011

  • APPROVAL PAGE

    I certify that I have supervised and read this study and that in my opinion it confirm to

    acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as

    a research paper for the degree of Corporate Master in Business and Administration.

    Dr. Evan Lau Poh Hock

    Supervisor

    This research paper was submitted to the Faculty of Economics and Business, UNIMAS and

    is accepted as partial fulfillment of the requirement for the degree of Corporate Master of

    Economic and Business.

    Prof. Dr. Shazali Abu Mansor Dean, FEB

    UNIMAS

    11

  • I DECLARATION AND COPYRIGHT

    Name : Linda Then Wee Mei Metric number: 09031603

    I hereby declare that this research is the result of my own investigation, except where

    otherwise stated. Other sources are acknowledged by footnotes giving explicit reference and

    a bibliography is appended.

    ~(1~ . Signature Date :lit} 0&1)0/1

    Copyright by Linda Then Wee Mei and UNIVERSITI MALAYSIA SARA W AK

    HI

  • I WORDS OF ACKNOWLEDGEMENTS

    First of all, I would like to thank my supervisor, Dr. Evan Lau for him guidance

    throughout the process of writing the research paper. He constantly motivates me to keep on

    working on the research paper even though there are times at which I feeJ like giving up on

    the research paper.

    My word of gratitude also goes out to all my friends and course mates from UNIMAS

    for their moral support and encouragement. Without them, this research would not be made

    possible. At the same time, I would like to thank my wonderful parents who have always

    motivated me to write this research paper until its very end.

    On the whole, I would like to thank anyone and everyone (whom I cannot list out in

    this acknowledge page) for their moral support and financial support.

    Once again, thank you very much for all your helps. I appreciate it very much!

    THANK YOU!

    IV

  • ABSTRACT

    (:he purpose of this research is to investigate that the relationship between producer price

    index (PPI) and consumer price index (CP1) in Malaysia. In contrast with previous studies,

    many information of the PPI to be useful forecasts improve to the CPI. The research use

    monthly data of consumer price index (CPO and producer price index (PPI) from period

    January 1986 to December 20 1~ The unit root test and Johansen co integration test is used

    to investigate the transfer of change from consumer price index and producer price index, or

    in other words to test the existence or not of a long-term relationship between the two

    variables. Granger Causality test to find that there is uni-directional or bi-directional

    causality between the PPI and CPI. The result shown that policy makers to rely more on the

    link to between CPI and PPI and use changes in PPI to predict changes in CPI.

    Keywords: Consumer price index; Producer price index; Unit root; Co-integration; Granger

    causality

    v

  • I

    TABLE OF CONTENT

    NO. ITEM PAGE Preliminary Pages Title Page Approval Page Declaration & Copyright Words of Acknowledgement Abstract Table of Content List ofTable List of Figures

    1. CHAPTER ONE 1.0 Introduction 2

    1.1 The Trend of Consumer Price Index and Producer Price Index 6

    1.2 Conceptual framework of CPI and PPI 8

    1.3 Problem Statement 11

    1.4 Objective of Research 13

    1.5 Significant of Study 14

    1.6 Scope of Study 15

    1.7 Organization of Chapters 16

    2. CHAPTER TWO 2.0 Introduction 17

    2.1 Review ofConsumer Price Index (CPI) 19

    2.2 Review of Producer Price Index (PPI) 27

    2.3 Review of Relationship between CPI and PPI 30

    2.4 Summary 37

    3. CHAPTER THREE 3.0 Introduction 43

    3.1 Theoretical Framework 43

    3.2 Research Design 44

    3.3 Source Data 45

    3.4 Methodology 45

    3.5 Unit Root Test 45

    3.5.1 Augmented Dickey-Fuller (ADF) 46

    3.5.2 Philips-Perron(PP) 47

    3.6 Cointegration 48

    3.6. r The Johansen and Juse ius(l990) 50

    3.7 Granger Causality 51

    3.8 Summary 52

    vi

  • TABLE OF CONTENT

    NO. ITEM 4. CHAPTER FOUR

    4.0 Introduction 4.1 Unit Root Test

    4.1.1 Augmented Dickey-Fuller (ADF) and Philip-Perron (PP) 4.2 The Johansen Cointegration Test 4.3 Granger Causality Test 4.4 Summary

    5. CHAPTER FIVE 5.0 Introduction 5.1 Conclusion from the research 5.2 Policy Implementation 5.3 Limitation and recommendation for future study 5.4 Summary

    6. REFERENCES

    PAGE

    54 54 54 56 58 61

    62 62 65 68 69

    70

    vii

  • LIST OF TABLES

    TABLE DESCRIPTION PAGE

    Table 1 Review of Consumer Price Index (CPI) 24

    Table 2 Review of Producer Price Index (PPI) 29

    Table 3 Review of Consumer Price Index (CPI) and Producer Price Index (PPI) 38

    Table 4 Unit Root Test (Level) 55

    Table 5 Unit Root Test (First Difference Level) 55

    Table 6 Johansen and Juselius Cointegration Test Result 57

    Table 7 Result of Granger Causality Test 59

    LIST OF FIGURES

    FIGURE DESCRIPTION PAGE

    Figure 1 The Trend of Consumer Price Index in Malaysia, 1970-2010 6

    Figure 2 The Trend of Producer Price Index in Malaysia, 1970-2010 7

    Figure 3 Theoretical Framework - Relationship between CPI and PPJ 43

    Figure 4 Summaries of Methodologies used to examine the Relationship CPJ and PPI 53

    Vlll

  • CHAPTER ONE

    INTRODUCTION

    r.

    1.0 lntroduction

    In Malaysia, stock market barometers of the national economy, CPI and PPI as

    the core indicators of economic performance, on the national economy and capital

    markets have a profound impact. Thus, Consumer price and producer price focused on

    have been primarily focused on trying to gauge the growth in the economy which is

    designed primarily to gauge the level of price stability in the economy.

    Consumer Price Index (CPI) is similarly to a cost of living (Triplett, 1999). CPI

    is one of the most important economic indicators in any country. It is uses for

    measurement of the rate of inflation, for indexation of public pension benefits and for

    many policy purposes (Takanobu, 2000). The Consumer Price Index (CPI) provides

    data on the month-over-month and year-over-year changes in the prices paid by urban

    consumers for a representative basket of goods and services (Yusoff, 2000). It is the

    main inflation report for the futures and financial markets. Unexpected rises in this

    indicator usually lead to falling bond prices, rising interest rates, and increased market

    volatility.

    cpr is a price index of measuring changes through time in the price level of

    consumer goods and services purchased by household. (Boskin, Dulberger, Gordon,

    Giliches & Jorgenson, 1998). Besides that, it calculates by national statistical agencies.

    CPI is designed to provide broad measures of changes in retail price experienced by

    Malaysian households as a group and should not be expected to exactly reflect the

    2

  • experience of any individual household (Yusoff, 2000). Consumer prices are important

    because consumer buying drives in the economy.

    CPl also examines the weighted average of prices of a basket of consumer

    goods and services, such as transportation, food and medical care. The CPl is

    calculated by taking price changes for each item in the predetermined basket of goods

    and averaging of the goods are weighted according to their importance. Changes in

    CPI are used to assess price changes associated with the cost of living (Yusoff, 2000).

    In the United States the major indexes of the seven points of goods, including are food,

    wine and drinks house, Dress, Traffic, Medical health, Entertainment, Other goods and

    services.

    CPJ index is very important, but must be cautious with revelatory, because

    released this index rose, the currency market, sometimes the opposite. Because the

    consumer price index levels that consumer purchasing power, also reflects the

    economic boom. When the country's consumer price index rising, shows that the

    country's rising inflation, which is the buying power of a currency weakens, according

    to the theory of purchasing-power parity, the country's currency should go weak. But

    various countries to control inflation which inflation rising interest rates raise effect of

    the opportunity and instead of the good. Conversely, when the country's consumer

    price indexes show as inflation which is the buying power of a currency rises, the

    country's currency should be stronger. When inflation under control and tends to

    decline, interest rates will decline, instead of the light in this region.