Local Food Prices and International Price Transmission

World food prices spiked in the periods 2007-2008 and 2010-2011. The impact of these spikes in world food prices on local food prices and thus on local consumers is determined by the food price pass through. Pass through is defined as the extent to which changes in world food prices lead to changes in local food prices. We examine the determinants of variation in food price pass through from global to local consumer prices in a global sample of 147 countries, using FAO data on world food prices and ILO data on food prices for consumers. While market integration matters, our study finds that income per capita is the dominant factor explaining cross-country variation in pass through of food prices. We estimate an elasticity of about -0.3 of pass through with respect to income per capita. This means far greater price transmission of food price shocks at the commodity level to final consumers in low income countries than in high income countries. The implication is that future swings in world food prices will in particular jeopardise food security in poor countries. Trade policy measures of market integration also affect the pass through significantly, whereas infrastructure and geography measures play no significant role.