Szilagyiova, Silvia, Anchor, J.R and Dastgir, Shabbir (2012) World commodity prices and UK inflation indexes: Food for thought? In: PhD Conference in Monetary and Financial Economics, May 2012, Bristol Business School. (Unpublished)
Abstract

The dynamics of food price inflation have changed significantly. So, understanding them is important for policy not only in developing countries but also in developed countries like the UK. A question that has risen is the role, if any, of central banks in combating global food price inflation.
The financial crisis and its negative consequences represent the primary problem for policy makers in stabilizing all economies. However the food crisis should not be forgotten since the dynamic of the structural problems of food prices have accelerated recently due to the problems associated with the financial crisis. As the financial crisis causes imbalances in financial markets and a liquidity trap for the banking sector, it also affects investments in agriculture in developing countries. Due to reduced growth, investment and productivity in developing countries, it is estimated that by 2020 rice prices will rise by 13 per cent, wheat by 15 per cent and maize by 27 per cent. Therefore, looking beyond the present crisis, we can expect other challenges to emerge, one of which is a possible resurgence in food and other commodity prices.
This paper proposes a framework which views the recent rise in global food prices as a consequence of the global financial crisis and applies this approach to considering how the increasing prices of food products affect inflation targeting in the UK, cause inflation uncertainty and points out the weakness of Consumer Price Index (CPI) as a measure of inflation in the UK.
Our results show that over the period 1970 – 2011, Granger causality tests reject the hypothesis that global food prices do not cause inflation in the UK, whereas the same hypothesis is not rejected for oil prices. Considering the rising trend of global food prices and that the contribution of food to a change in the UK’s CPI index in 2011 was 10 per cent, which makes it the most significant factor after housing and transport, opens a discussion about whether the declining weight of food prices in the UK’s CPI may disorient policy makers and lead to wrong decisions about interest rates.
This paper has potential implications for future studies of the emerging challenges of monetary policy in the UK and may contribute to solving the problem of the exceeding of the inflation targeting tolerance bands in the UK by implementing a more accurate measure of inflation.

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