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Reconsidering the Role of Food Prices in Inflation

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  • James P Walsh
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    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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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/71.

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    Length: 21
    Date of creation: 01 Apr 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/71

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    Related research

    Keywords: Agricultural commodities; Consumer price indexes; External shocks; Low-income developing countries; inflation; monetary policy; price inflation; measure of inflation; central bank; inflation dynamics; price level; monetary fund; inflationary expectations; monetary policy regimes; lower inflation; retail price index; price of goods; price stability; monetary transmission;

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    1. Bilke, Laurent & Stracca, Livio, 2008. "A persistence-weighted measure of core inflation in the euro area," Working Paper Series, European Central Bank 0905, European Central Bank.
    2. Robert Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 19-38.
    3. L. J. �lvarez & E. Dhyne & M. Hoeberichts & C. Kwapil & H. Le Bihan & P. L�nnemann & F. Martins & R. Sabbatini & H. Stahl & P. Vermeulen & J. Vilmunen, 2005. "Sticky Prices in the Euro Area: a Summary of New Micro Evidence," DNB Working Papers, Netherlands Central Bank, Research Department 062, Netherlands Central Bank, Research Department.
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    Cited by:
    1. repec:wbk:wbpubs:12098 is not listed on IDEAS
    2. World Bank, 2011. "Global Economic Prospects, Volume 3, June 2011 : Maintaining Progress Amid Turmoil," World Bank Publications, The World Bank, number 12103, August.
    3. Carlos Garcia & Jesisbé Mejía, 2012. "Optimal macroeconomic stabilization policy of food, metal, and energy price cycles in small open economies," ILADES-Georgetown University Working Papers, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines inv284, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    4. Agnieszka Leszczynska & Katarzyna Hertel, 2013. "Inflation persistence – a disaggregated approach," EcoMod2013 5692, EcoMod.

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