Welfare Impacts of Food Price Inflation in Ethiopia
In Ethiopia, changes in the prices of teff, wheat and maize tend to affect more the people at the higher income quintile in rural areas, while in urban areas they tend to affect those at the lower income quintiles. The hike in relative prices from 2006-2007 has increased the urban cost of living by 8-12 percent in urban areas. Inflation could worsen urban income inequality significantly. Demand for teff, maize and wheat tends to be elastic, with evidence of substitutability, especially between teff and wheat. In urban areas, all three types of cereals tended to be necessities, with inelastic price responses. Measuring the rural welfare impact of inflation for households is challenging, given the simultaneous production and consumption decisions and responsiveness of consumption decisions to price and incomes. Overall, it appears that rises in the relative price of food tends to benefit rural households in Ethiopia, though the exact magnitude needs to be investigated further.
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