Reconsidering the Role of Food Prices in Inflation
TL;DR: This article showed that food price inflation is not only more volatile but also on average higher than non-food inflation, leading to a downward bias to forecasts of future inflation and lags in policy responses.
Abstract: Food prices are generally excluded from measures of inflation most closely watched by policymakers due either to their transitory nature or their higher volatility. However, in lower income countries, food price inflation is not only more volatile but also on average higher than nonfood inflation. Food inflation is also in many cases more persistent than nonfood inflation, and shocks in many countries are propagated strongly into nonfood inflation. Under these conditions, and particularly given high global commodity price inflation in recent years, a policy focus on measures of core inflation that exclude food prices can misspecify inflation, leading to higher inflationary expectations, a downward bias to forecasts of future inflation and lags in policy responses. In constructing measures of core inflation, policymakers should therefore not assume that excluding food price inflation will provide a clearer picture of underlying inflation trends than headline inflation.
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TL;DR: In this paper, the authors compared the inflationary impact of commodity price shocks across countries to a broad range of structural characteristics and policy frameworks over the period 2001-2010, using several approaches.
Abstract: This paper relates the inflationary impact of commodity price shocks across countries to a broad range of structural characteristics and policy frameworks over the period 2001-2010, using several approaches. The analysis suggests that economies with higher food shares in CPI baskets, fuel intensities, and pre-existing inflation levels were more prone to experience sustained inflationary effects from commodity price shocks. Countries with more independent central banks and higher governance scores seem to have contained the impact of these shocks better. The effect of the presence of inflation targeting regimes, however, appears very modest and not evident during the 2008 food price shock. The evidence suggests that trade openness, financial development, dollarization, and labor market flexibility do not significantly influence the way in which domestic inflation responds to international commodity price shocks.
95 citations
TL;DR: In this article, the authors presented new estimates of pass-through coefficients from international to domestic food prices by country in the Middle East and North Africa, and found that despite the use of food price subsidies and other government interventions, a rise in global food prices is transmitted to a significant degree into domestic prices in many countries in the region.
Abstract: This paper presents new estimates of pass-through coefficients from international to domestic food prices by country in the Middle East and North Africa. The estimates indicate that, despite the use of food price subsidies and other government interventions, a rise in global food prices is transmitted to a significant degree into domestic food prices in many countries in the Middle East and North Africa, although cross-country variation is significant. In nearly all countries, domestic food prices are highly downwardly rigid. The finding of asymmetric price transmission suggests that not only international food price levels matter, but also food price volatility. High food pass-through tends to increase inflation pressures, where food consumption shares are high. Domestic factors, often linked to storage, logistics, and procurement, have also played a major role in explaining high food inflation in the majority of countries in the region.
85 citations
TL;DR: The authors discusses the role of commodity price shocks in monetary policy in the light of recent episodes of such shocks and discusses other factors that may explain different inflationary performances across countries, including food inflation, more than energy inflation, has relevant propagation effects on core inflation.
Abstract: During the second half of the 2000s, the world experienced a rapid and substantial rise in commodity prices. This shock posed complex challenges for monetary policy, in particular because of the significant increase in food and energy prices, and the repercussions they had on aggregate inflation measures. This paper discusses the role of commodity price shocks (CPS) in monetary policy in the light of recent episodes of such shocks. It begins by discussing whether monetary policy should target core or headline inflation, and what should be the role of CPS in setting interest rates. It is argued that there are good reasons to focus on headline inflation, as most central banks actually do. Although core inflation provides a good indicator of underlying inflation pressures, the evolution of commodity prices should not be overlooked, because of pervasive second-round effects. This paper reviews the evidence on the rise of inflation across countries and reports that food inflation, more than energy inflation, has relevant propagation effects on core inflation. This finding is particularly important in emerging market economies, where the share of food in the consumer basket is significant. The evidence also shows that countries that had lower inflation during the run up of commodity prices before the global crisis had more inflation in the subsequent rise after the global crisis, suggesting that part of the precrisis inflationary success may have been because of repressed inflation. This paper also discusses other factors that may explain different inflationary performances across countries.
76 citations
Cites background from "Reconsidering the Role of Food Pric..."
...Indeed, Walsh (2011) argues that the justification for focusing on core inflation relies on the idea that headline and core inflation have the same long-run mean, and noncore inflation has no long-run effects on core inflation....
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TL;DR: In this article, the authors used Granger causality and structural vector autoregressive (SVAR) methods to examine the dynamic linkages between commodity prices and both overall inflation and non-food non-fuel inflation.
Abstract: The global economy experienced sharp spikes in food and oil prices in 2008–2009 and 2011 period. Oil prices and food price shocks are believed to have played a prominent role in the build-up of persistent inflationary pressures in Kenya in the recent past. This study uses Granger causality and structural vector autoregressive (SVAR) methods to examine the dynamic linkages between commodity prices and both overall inflation and non-food non-fuel inflation. The study finds a significant role of oil and food prices in both measures of inflation. Specifically, the study reveals that food prices are more important than oil prices in explaining overall and non-food non-fuel inflation when both variables are considered in the same VAR framework. However, the effect of oil prices on inflation is more persistent than the effect of food prices. The paper also finds that the food and oil inflation effects have more significant influence on non-food non-fuel inflation than money supply growth rate and that oil price shocks immediately depreciate the exchange rate. Based on the results, the study recommends adoption of measures to reduce oil dependence, usage of targeted intervention rather than tax waivers during crisis periods, strengthening of supply response measures and a neutral monetary policy stance in the face of shocks unless they get entrenched in the non-food non-fuel inflation.
39 citations
Cites background from "Reconsidering the Role of Food Pric..."
...…non-fuel (core inflation) developments due to their greater volatility can lead to an underestimation of the level of inflation in the non-food non-fuel baskets particularly in emerging non-oil producing countries where the transmission of food and fuel prices is a significant factor (Walsh, 2011)....
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...However, discounting food and oil price developments relative to non-food non-fuel (core inflation) developments due to their greater volatility can lead to an underestimation of the level of inflation in the non-food non-fuel baskets particularly in emerging non-oil producing countries where the transmission of food and fuel prices is a significant factor (Walsh, 2011)....
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TL;DR: In this article, the authors developed a two-sector two-good closed economy new Keynesian model to study the optimal choice of price index in markets with financial frictions, and they showed that in the presence of financial friction, stabilizing core inflation is no longer equivalent to stabilizing output fluctuations.
Abstract: In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. In this paper, we develop a two-sector two-good closed economy new Keynesian model to study the optimal choice of price index in markets with financial frictions. Financial frictions that limit credit-constrained consumers’ access to financial markets make demand insensitive to interest rate fluctuations. The demand of credit-constrained consumers is determined by their real wage, which depends on prices in the flexible price sector. Thus, prices in the flexible price sector influence aggregate demand and, for monetary policy to have its desired effect, the central bank has to stabilize price movements in the flexible price sector. Also, in the presence of financial frictions, stabilizing core inflation is no longer equivalent to stabilizing output fluctuations. Our analysis suggests that in the presence of financial frictions a welfare-maximizing central bank should adopt flexible headline inflation targeting – a target based on headline rather than core inflation, and with some weight on the output gap. We discuss why these results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit-constrained.
36 citations
References
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TL;DR: In this paper, median-unbiased estimators for univariate AR(p) models with time trends with confidence intervals also are considered and the results show that most of the series exhibit substantially greater persistence than least squares estimates and some Bayesian estimates suggest.
Abstract: This article introduces approximately median-unbiased estimators for univariate AR(p) models with time trends. Confidence intervals also are considered. The methods are applied to the Nelson–Plosser macroeconomic data series, the extended Nelson–Plosser macroeconomic data series, and some annual stock-dividend and price series. The results show that most of the series exhibit substantially greater persistence than least squares estimates and some Bayesian estimates suggest. For example, for the extended Nelson–Plosser data set, 8 of the 14 series are estimated to have a unit root, but 6 are estimated to be trend stationary. In contrast, the least squares estimates indicate trend stationarity for all of the series.
478 citations
TL;DR: In this paper, the authors argue that measured (RPI) inflation is conceptually mismatched with core inflation: the difference is more than just "measurement error", and propose a technique for measuring core inflation, based on an explicit long-run economic hypothesis.
Abstract: In this paper we argue that measured (RPI) inflation is conceptually mismatched with core inflation: the difference is more than just "measurement error". We propose a technique for measuring core inflation, based on an explicit long-run economic hypothesis. Core inflation is defined as that component of measured inflation that has no (medium-to) long-run impact on real output - a notion that is consistent with the vertical long-run Phillips curve interpretation of the co-movement in inflation and output. We construct a measure of core inflation by placing dynamic restrictions on a vector autoregression (VAR) system.
477 citations
TL;DR: In this article, the persistence of inflation in the United States has been investigated over time using different measures and estimation procedures and they produce confidence intervals for their estimates as well as formal tests of unchanged persistence.
324 citations
TL;DR: This paper used disaggregate inflation data spanning all of consumption to examine the persistence of disaggregated inflation relative to aggregate infation, the distribution of persistence across consumption sectors, and whether persistence has changed.
Abstract: This paper uses disaggregate inflation data spanning all of consumption to examine: (i) the persistence of disaggregate inflation relative to aggregate infation; (ii) the distribution of persistence across consumption sectors; and (iii) whether persistence has changed. Assuming mean inflation to be unchanged within samples, the average persistence of disaggregate inflation is consistently below aggregate persistence. Taking into account an early 1990s shift in mean inflation identified by break tests - including tests applied to systems of disaggregate equations - yields much lower estimates of both aggregate and disaggregate persistence for 1984-02. But with the mean break taken into account, average disaggregate persistence is actually as great as aggregate inflation persistence. A factor model provides a natural framework for interpreting the relationship between aggregate and disaggregate persistence.
142 citations