Food, Fuel, and Facts: Distributional Effects of Global Price Shocks

We estimate distributional implications of global food and oil price shocks by utilizing monthly panel data on consumption and income from India, and an IV strategy that removes variation coming from global demand shocks. While both shocks lead to stagflationary aggregate dynamics, they differ in terms of distributional consequences. Consumption of lower income deciles is affected more by exogenous increases in food prices, while consumption of both tails of the income distribution is affected similarly by exogenous increases in oil prices. These heterogeneous negative consumption responses largely mirror the pattern of heterogeneity in wage income responses. Increases in relative expenditure of food, despite a rise in the relative local price of food, provides clear evidence for non-homothetic demand in non-durable consumption. Estimating the slopes of the Engel curve by impulse response matching, we find that food, compared to fuel, is a necessary consumption good for all income groups. Comparing the model predictions with the empirical consumption responses, we decompose the role played by wage income, relative price changes, and non-homotheticity in explaining our results.