Inflation in the Middle East—Looking at the Right Numbers

IMF Blog, June 6, 2011

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Inflation in the Middle East—Looking at the Right Numbers

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Bibliographic details

• Authors: Masood Ahmed
• Published: June 6, 2011

Overview

• Author: Masood Ahmed
• Date: June 6, 2011
• Context: Surging international food prices have become a major cause for concern and topic of debate, particularly in the Arab world where rising food prices have been one of the factors in recent political unrest.
• Policy responses observed across the region: hikes in fuel and food subsidies, civil service wage and pension increases, additional cash transfers, tax reductions, and other spending increases.

Headline inflation versus core inflation

• Headline inflation:
  • Measures the overall consumer price index reflecting the cost of a typical basket of household items, ranging from food to clothing to rent.
  • Can be influenced by seasonal factors (e.g., food prices easing at harvest time) and changes in volatile items such as food and energy prices.
• Core inflation:
  • Attempts to indicate underlying inflation trends by excluding products prone to temporary price shocks, typically food and fuel items.
  • Can differ from headline inflation in any given month, though over the medium term core and headline inflation rates generally converge.
  • Has been the yardstick for many central banks in advanced economies where the weight of food and fuel in consumption baskets is relatively small.

Regional evidence and dynamics

• Across the Middle East and North Africa:
  • Headline inflation has accelerated over the last year, driven mainly by rising international commodity prices.
  • Food and fuel account for about half of the items included in the typical consumption baskets of the region.
  • Food price inflation is higher, more volatile, and more persistent than nonfood inflation.
  • Core inflation has exhibited a more modest upward trend than headline inflation over the last 12 months.
• Transmission from food to nonfood inflation:
  • "We calculate that in the Middle East and North Africa, about half of a shock to food inflation in any given quarter is transmitted to nonfood inflation in the following quarter of the year."

Policy implications and recommendations

• Central banks in the region should not focus exclusively on core inflation when setting policy rates and the overall stance of monetary policy.
• Authorities need to monitor both headline and core inflation to obtain a complete picture of inflation developments.
• Ignoring headline inflation risks:
  • Providing a distorted picture of overall inflation trends when food and fuel comprise a large share of the consumption basket.
  • Underestimating inflation pressures.
  • Delaying needed monetary policy responses and thereby increasing peoples’ future inflation expectations.
• Given evidence of spillovers from food and fuel into core inflation (via inflation expectations and wage demands), readiness to react and contain inflation pressures as needed is essential.

Key findings and takeaways

• Food and fuel make up about half of typical consumption baskets in the region.
• Headline inflation has accelerated over the last year; core inflation has risen more modestly over the last 12 months.
• Food price inflation is higher, more volatile, and more persistent than nonfood inflation.
• About half of a shock to food inflation in any given quarter is transmitted to nonfood inflation in the following quarter of the year.
• Regional central banks need to focus on both headline and core inflation to avoid underestimating inflation pressures and to be ready to respond.

Source: Inflation in the Middle East—Looking at the Right Numbers, Masood Ahmed, June 6, 2011.