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Reconsidering the Role of Food Prices in Inflation

Author/Editor: Walsh, James P
Authorized for Distribution: April 1, 2011
Electronic Access: Free Full Text (PDF file size is 1,668KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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. 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.
 
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Series: Working Paper No. 11/71
Subject(s): Agricultural commodities | Commodity price fluctuations | Consumer price indexes | External shocks | Inflation | Low-income developing countries | Prices
Author's keyword(s): inflation | core inflation | commodity prices food prices | persistence | inflation expectations
 
English  
    Published:   April 1, 2011        
            Format:   Paper
    Stock No:   WPIEA2011071   Pages:   21
    Price:   US$18.00
       
     
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