Food Inflation in EU: Distribution Analysis and Spatial Effects

In the European Union homogenous inflation forces are expected to prevail due to the increased economic integration, especially after the creation of the single currency area. This expectation is directly related to the issue of inflation convergence which has gained increasing attention by both academia and policy makers in Europe. While the examination of the core inflation is of great importance for macroeconomic policy, the prominent role of disaggregate inflation indices and especially food inflation has been also frequently emphasized in the literature. However, the issue of food inflation convergence has been largely ignored in empirical studies. This study explores the evolving distribution of the food inflation rates in the EU-25 member states, using the distribution dynamics analysis and covering the period from January 1997 to March 2011. This analysis rests on the assumption that each country represents an independent observation which provides unique information that can be used to estimate the transition dynamics of inflation. However, we show that inside EU-25, spatial autocorrelation prevails and therefore, the independency assumption is violated. To insure spatial independence, the Getis spatial filter is implemented prior to the distribution dynamics analysis. The results of the analysis confirm the existence of convergence trends which are even more clear after the spatial filtering procedure, indicating, on the one hand, the influence of spatial effects on food inflation and, on the other hand, the effectiveness of Getis spatial filtering.