Understanding the food component of inflation

TL;DR

This paper investigates the determinants of food inflation across 35 countries over 30 years, confirming the Phillips curve relation, the influence of inflation expectations, and the weak link between domestic and global food prices.

Contribution

It provides empirical evidence on the relationship between economic overheating, inflation expectations, and food inflation, and quantifies the effects of trade and production factors.

Findings

Phillips curve relation holds for food inflation.

Inflation expectations significantly impact food prices.

Weak pass-through from global to domestic food prices.

Abstract

This article presents evidence based on a panel of 35 countries over the past 30 years that the Phillips curve relation holds for food inflation. That is, broader economic overheating does push up the food component of the CPI in a systematic way. Further, general inflation expectations from professional forecasters clearly impact food price inflation. The analysis also quantifies the extent to which higher food production and imports, or lower food exports, reduce food inflation. Importantly, the link between domestic and global food prices is typically weak, with passthroughs within a year ranging from 0.07 to 0.16, after exchange rate variations are taken into account.