Reconsidering the Role of Food Prices in Inflation
IMF Working Papers, April 1, 2011
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Bibliographic details
- Authors: James P Walsh
- Published: April 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455227082.001
Summary
- Food prices are generally excluded from measures of inflation most closely watched by policymakers due either to their transitory nature or their higher volatility.
- In lower income countries:
- Food price inflation is more volatile than nonfood inflation.
- Food price inflation is on average higher than nonfood inflation.
- Food inflation is in many cases more persistent than nonfood inflation.
- Shocks to food prices in many countries are propagated strongly into nonfood inflation.
- A policy focus on measures of core inflation that exclude food prices can:
- Misspecify inflation under the conditions described above.
- Lead to higher inflationary expectations.
- Introduce a downward bias to forecasts of future inflation.
- Produce lags in policy responses.
- Recommendation: In constructing measures of core inflation, policymakers should not assume that excluding food price inflation will provide a clearer picture of underlying inflation trends than headline inflation.
Key Findings and Evidence
- Food price inflation is not only more volatile but also higher on average than nonfood inflation in lower income countries.
- Food inflation can be more persistent than nonfood inflation.
- Food-price shocks are often transmitted significantly into nonfood inflation.
- High global commodity price inflation in recent years amplifies the risk that excluding food prices from core measures will mislead policy assessment.
Policy Implications and Recommendations
- Do not automaticall y exclude food price inflation when constructing core inflation measures, especially in lower income countries or during periods of high commodity price inflation.
- Reassess the assumption that excluding food prices yields a clearer measure of underlying inflation trends than headline inflation.
- Consider the potential for:
- Higher inflationary expectations if food-price-driven inflation is ignored.
- Downward-biased forecasts of future inflation.
- Delayed policy responses due to reliance on trimmed measures that omit food prices.