World Commodity Prices and Domestic Retail Food Price Inflation: Some Insights from the UK

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Davidson, J. ; Halunga, A. ; Lloyd, T. ; McCorriston, S. ; Morgan, W. (2016)

We address the links between world commodity prices and retail food price inflation, focussing on two aspects. First, since world commodity prices represent a relatively small share of costs of retail food products, retail price behaviour may differ from world commodity prices and other factors (exchange rates and other input costs) will also matter in determining retail food inflation. Second, noting that the world price spike of 2007-2008 was different in the level and duration from the price spike experienced in 2011, we also emphasise an obvious but neglected fact that the effect on retail food price inflation depends on the duration of the shocks on world commodity markets, not just the magnitude of price spikes (the latter often commanding most attention). Being an open economy reliant on world commodity trade, the UK offers a natural and hitherto unexplored setting for the analysis. Applying time series methods to a sample of 259 monthly observations over the 1990(9)-2012(3) period we find substantial and significant long term partial elasticities for domestic food price inflation with respect to world food commodity prices, the exchange rate and oil prices (the latter indirectly via a relationship with world food commodity prices). Domestic demand pressures and food chain costs are found to be less substantial and significant over our data period. Interactions between the main driving variables in the system tend to moderate rather than exacerbate these partial effects. Furthermore, the persistence of shocks to these variables markedly affects their effects on domestic food prices.
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