IDEAS home Printed from https://ideas.repec.org/a/unt/japsdj/v26y2019i1p85-111.html
   My bibliography  Save this article

Impact of food inflation on headline inflation in India

Author

Listed:
  • Anuradha Patnaik

    (PhD, Associate Professor, Mumbai School of Economics and Public Policy, University of Mumbai, India)

Abstract

A commonly held belief in the 1970s was that price indices rise because of temporary noise, and then revert after a short interval (Cecchetti and Moessner, 2008). Accordingly, policy should not respond to the inflation because of these volatile components of the price indices. This led to the development of the concept of core inflation (Gordon, 1975), which is headline inflation excluding food and fuel inflation. It was strongly believed that in the long run, headline inflation converges to core inflation and that there are no second round effects (that is an absence of core inflation converging to headline inflation). In recent years, however, major fluctuations in food inflation have occurred. This has become a major problem in developing countries, such as India, where a large portion of the consumption basket of the people are food items. Against this backdrop, in the present paper, an attempt is made to measure the second round effects stemming from food inflation in India using the measure of Granger causality in the frequency domain of Lemmens, Croux and Dekimpe (2008). The results of empirical analysis show significant causality running from headline inflation to core inflation in India and as a result, the prevalence of the second round effects. They also show that food inflation in India is not volatile, and that it feeds into the expected inflation of the households, causing the second round effects. This calls for the Reserve Bank of India to put greater effort in anchoring inflation expectations through effective communication and greater credibility.

Suggested Citation

  • Anuradha Patnaik, 2019. "Impact of food inflation on headline inflation in India," Asia-Pacific Sustainable Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 26(1), pages 85-111, June.
    • Handle: RePEc:unt:japsdj:v:26:y:2019:i:1:p:85-111
    as

    Download full text from publisher

    File URL: https://www.unescap.org/sites/default/files/4%20Anuradha%20Patnaik_0.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Amrendra Pandey & Jagadish Shettigar & Amarnath Bose, 2021. "Evaluation of the Inflation Forecasting Process of the Reserve Bank of India: A Text Analysis Approach," SAGE Open, , vol. 11(3), pages 21582440211, July.
    2. Asharani Samal & Phanindra Goyari, 2022. "Does Monetary Policy Stabilise Food Inflation in India? Evidence From Quantile Regression Analysis," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 55(3), pages 361-372, September.

    More about this item

    Keywords

    core inflation; monetary policy; food inflation; second round effects; inflation expectations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:unt:japsdj:v:26:y:2019:i:1:p:85-111. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Office of the Executive Secretary, ESCAP (email available below). General contact details of provider: https://edirc.repec.org/data/escapth.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.