This paper reexamines whether producer prices help predict consumer prices, focusing on model stability and the forecasting performance of time-varying parameter models. In bivariate models, producer price inflation consistently Granger-causes consumer price inflation in-sample but fails to improve out-of-sample forecasts of consumer price inflation. The tests of Nyblom (1989), Andrews (1993), and Andrews and Ploberger (1994) indicate instability pervades the bivariate models. Allowing for a simple form of instability, however, fails to improve the predictive power of producer prices. Even in models using the stochastic coefficients formulation developed by Cooley and Prescott (1973(a), 1973(b), 1976), among others, producer prices do not help to forecast consumer prices.
