Analyzing the interplay between consumer price index, housing price index and industrial wages in indian context

Abstract

This undergraduate thesis delves into understanding the vital relationship between the economic indicators, the Consumer Price Index (CPI) and the Housing Price Index (HPI), and how "wages" act as a mediator between the two in the Indian context. With India being the fastest-growing economy, analyzing and understanding the interplay of these indicators is crucial for policymakers and investors. An increase in CPI, which measures the prices for consumer goods and services, can impact housing prices by raising material and labor costs and interest rates for housing loans, which can further drive up the overall prices in the economy and thus shoot up inflation, which affects the wages of industrial workers and thus the demand for housing. This complex relationship is the focal point of interest for the thesis, which has been studied in two steps. Firstly, I attempted to understand the predictability of one variable by the other using Granger Causality tests. In the second step, I used a multiple linear regression model considering CPI as the dependent variable and HPI as the independent variable while controlling for unemployment, consumer sentiments and state-level fixed effects. The quarterly data from March 2016 until March 2023 has been collected and analyzed for nine states and aggregated at the Indian level using state-level GDP as weights. The thesis finds that an increase in CPI forecasts an increase in housing costs and wages in the long run. Similarly, an increase in HPI and wages predict an increase in CPI over a considerable period (more than four quarters). The relationship between HPI and wages opens up interesting insights to look upon. The thesis looks into the variability of these results across states and discusses the potential mechanisms that might influence policy-making decisions. It also looks into understanding whether the “wage-spiral” economic phenomenon exists in India.