International food commodity prices and missing (dis)inflation in the euro area. National Bank of Belgium, Working Paper No. 350

Peersman, Gert (2018) International food commodity prices and missing (dis)inflation in the euro area. National Bank of Belgium, Working Paper No. 350. [Working Paper]

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Abstract

This paper examines the causal effects of shifts in international food commodity prices on euro area inflation dynamics using a structural VAR model that is identified with an external instrument (i.e. a series of global harvest shocks). The results reveal that exoge- nous food commodity price shocks have a strong impact on consumer prices, explaining on average 25%-30% of inflation volatility. In addition, large autonomous swings in in- ternational food prices contributed significantly to the twin puzzle of missing disinflation and missing inflation in the era after the Great Recession. Specifically, without disrup- tions in global food markets, inflation in the euro area would have been 0.2%-0.8% lower in the period 2009-2012 and 0.5%-1.0% higher in 2014-2015. An analysis of the trans- mission mechanism shows that international food price shocks have an impact on food retail prices through the food production chain, but also trigger indirect effects via rising inflation expectations and a depreciation of the euro.

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