Academic journal article Asian Social Science

Is Food Price Inflation Transitory? Empirical Evidence from Sri Lanka

Academic journal article Asian Social Science

Is Food Price Inflation Transitory? Empirical Evidence from Sri Lanka

Article excerpt

Abstract

Food prices are excluded from core measures of inflation in many countries assuming food prices are transitory. Exclusion of food prices may lead to information loss, leading to higher inflationary expectations, a downward bias to forecasts of future inflation and lags in policy responses. Assumption that log food price series behave by way of I(1) and differenced log food price series linger in the manner of I(0) process leads to model misspecification. Correct identification of the memory in the food price series is vital for the correct model specification and is important for policy makers. This study aims to examine whether food price inflation is transitory in Sri Lanka by estimating the memory properties of food price series using non-parametric, semi-parametric and parametric tests. The study covers the period from January, 2003 to December, 2013. Results show that food price inflation, nonfood price inflation and headline inflation, and global food price inflation series are fractionally integrated. Food price series in Sri Lanka commoves with global food prices. Research findings show that food price inflation is not transitory, long memory series. The outcomes of this attempt have consequential implications towards food policy, trade policy and monetary policy makers. These findings suggest that neglecting food prices may render the core inflation measure a biased measure of long run inflation.

Keywords: fractionally integration, food price inflation, long memory, Sri Lanka, transitory

(ProQuest: ... denotes formulae omitted.)

1. Introduction

In today's globalized world, food price dynamics have a noticeable influence on the world's economic and political stableness as well as on the wellbeing of every single country. High and increasing food prices pose a significant policy challenge to macroeconomic stability in developing countries where the food expenditure share in household expenditure is relatively high (Mishra & Roy, 2012). Extreme volatility and increasing trend of food prices has energized the necessity of perceiving the behavior and the characteristics of food prices. According to Deaton (1999), a better understanding of commodity prices is necessary to construct good policy.

Figure 1 exhibits the mean and variance of global and domestic food prices have been increasing. Relatively oil price has more volatility which determine food price. Global food price volatility appears to have increased in recent years.

Food expenditure accounts to about one third of total expenditure in the world. However, countries in South Asia expend more than 50 percent on food and those in West Europe and North America the least (16%) (Wu, 2004). Sri Lanka is a small an import dependent and open economy. It is a net food importer. Food and beverages components in Colombo Consumer Price Index (CCPI) consists mainly rice, sugar, wheat, dairy products, lentils. According to Household Income and Expenditure Survey (HIES) in 2012, 80 percent of households spend more than 41 percent of their income on food and 50 percent of households spend more than 50 percent of their income on food and drink in Sri Lanka.

The food expenditure ratio is one of the primary indicators used to gauge the living standards of a population. The proportion of expenditure on food and drink to total expenditure is called the food expenditure ratio and it is generally given as a percentage. According to the HIES-2012/13, household population in Sri Lanka was 20.2 million. The urban population consists 3.6 million while rural population 15.7 million and estate population 0.9 million. These statistics show that majority of the Sri Lankan's population lives in rural area. The composition of population who live in rural and estate area is more than 80 percent from the total population in Sri Lanka. Table 1 shows the food ratio in Sri Lanka according to area of population.

The food ratio distribution among area of population in 2012/13 shows that those who live in rural and estate area have higher food ratio compared to those in urban. …

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