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Reconsidering the Role of Food Prices in Inflation

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  • James P Walsh

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.

Suggested Citation

  • James P Walsh, 2011. "Reconsidering the Role of Food Prices in Inflation," IMF Working Papers 11/71, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/71
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    References listed on IDEAS

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    1. Luis J. Álvarez & Emmanuel Dhyne & Marco Hoeberichts & Claudia Kwapil & Hervé Le Bihan & Patrick Lünnemann & Fernando Martins & Roberto Sabbatini & Harald Stahl & Philip Vermeulen & Jouko Vilmunen, 2006. "Sticky Prices in the Euro Area: A Summary of New Micro-Evidence," Journal of the European Economic Association, MIT Press, pages 575-584.
    2. Bilke, Laurent & Stracca, Livio, 2007. "A persistence-weighted measure of core inflation in the Euro area," Economic Modelling, Elsevier, vol. 24(6), pages 1032-1047, November.
    3. Robert W. Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38.
    4. Stephen G Cecchetti & Richhild Moessner, 2008. "Commodity prices and inflation dynamics," BIS Quarterly Review, Bank for International Settlements, December.
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    Cited by:

    1. Muhammad Nadim Hanif & Muhammad Jahanzeb Malik & Javed Iqbal, 2016. "Intrinsic Inflation Persistence in a Developing Country," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 12, pages 19-42.
    2. Nguyen, Anh D.M. & Dridi, Jemma & Unsal, Filiz D. & Williams, Oral H., 2017. "On the drivers of inflation in Sub-Saharan Africa," International Economics, Elsevier, vol. 151(C), pages 71-84.
    3. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Isaac Mwangi, 2013. "Commodity price shocks and inflation in a net oil-importing economy," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 37(2), pages 125-148, June.
    4. Anand, Rahul & Prasad, Eswar S. & Zhang, Boyang, 2015. "What measure of inflation should a developing country central bank target?," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 102-116.
    5. Asif Mahmood, 2016. "Transmission of Volatility of Money Market Overnight Repo Rate along the Yield Curve in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 12, pages 1-18.
    6. 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 inv284, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    7. repec:wbk:wbpubs:12098 is not listed on IDEAS
    8. Agnieszka Leszczynska & Katarzyna Hertel, 2013. "Inflation persistence – a disaggregated approach," EcoMod2013 5692, EcoMod.
    9. Franz Ruch & Stan du Plessis, 2015. "Working Paper – WP/15/05- Second-Round Effects from Food and Energy Prices- an SBVAR approach," Papers 7008, South African Reserve Bank.
    10. Sekhar, C.S.C. & Roy, Devesh & Bhatt, Yogesh, 2017. "Food inflation and food price volatility in India: Trends and determinants," IFPRI discussion papers 1640, International Food Policy Research Institute (IFPRI).
    11. World Bank, 2011. "Global Economic Prospects, Volume 3, June 2011 : Maintaining Progress Amid Turmoil
      [Perspectivas económicas mundiales junio de 2011 : mantener los advances en medio de la inestabilidad (Vol. 3)]
      ," World Bank Publications, The World Bank, number 12103.
    12. Misati, Roseline Nyakerario & Munene, Olive, 3. "Second Round Effects And Pass-Through Of Food Prices To Inflation In Kenya," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 3(3).

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