Explaining UK Food Price Inflation

Authors: Lloyd, T., McCorriston, S., Morgan, C.W., Davidson, J. and Halunga, A.

http://eprints.bournemouth.ac.uk/24500/

http://www.transfop.eu/papers/

Publisher: University of Exeter

ISBN: 978-0-902746-17-6

Colleagues at the Universities of Exeter and Nottingham have produced a paper on food price inflation in the UK. The paper is the first of the TRANSFOP working paper series. The paper addresses the high levels of food inflation experienced in the UK in recent years. As the paper notes, even setting aside the rise in food inflation following the commodity price spike of 2008-2009, food price inflation in the UK exceeded non-food price inflation for over the last decade or so. Moreover, food price inflation has tended to be relatively volatile. The paper sets out to explain the factors that primarily determine food price inflation.

They use a seven variable cointegrated vector autoregression model to address these issues. Notwithstanding the fact that the commodity price spike may have influenced domestic food price inflation, the authors also note that food prices in the downstream domestic market will be affected by a broader range of factors including other costs that matter to the food industry. These include exchange rates, labour costs, oil prices and so on. The analysis shows that world commodity prices and the sterling exchange rate were the main drivers of UK food price inflation. The oil price matters but to a lesser degree. They also show that the effect of commodity prices on the domestic inflation rate depends on how long the world commodity spike lasts for; the longer-lasting the spike on world commodity markets, the greater the effect on inflation not just because of the height of the spike but also because of the duration effect. With lags in the way in which industry and consumers respond to price increases, the effect of developments on world markets feeds through so that the effect becomes cumulative over time hence contributing to the higher inflation rate.

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