Global food prices and inflation

Abstract

Purpose: This paper aims to examine the role of global food price mean as well as volatility shocks as determinants of domestic food price inflation for a range of countries with different food shares in total consumption and in the CPI basket. The analysis provides useful information to policymakers to control inflation and also to market participants to develop appropriate investment strategies.

Design/methodology/approach: It uses the endogenous regime-switching model with dynamic feedback and interactions developed by Chang et al. (2023) to obtain mean and volatility indicators and then includes them in structural vector autoregressive models to assess their impact on inflation. Counterfactual analysis is also carried out.

Findings: The results suggest that both global food price mean and volatility shocks have sizeable effects on food price inflation in all countries and persistent second-round effects on core inflation in most countries. An extension of the analysis using disaggregate global food price data shows that the existence of second-round effects is independent of the size of the response of domestic food inflation to global food price shocks.

Originality/value: Unlike previous studies, the analysis carefully distinguishes between two types of global food price shocks (namely, mean or volatility) and their effects on core inflation, which provides crucial information to monetary authorities to formulate appropriate policy responses and to agents to make investment decisions.