The transmission of shocks to food and energy commodity prices to food inflation in the euro area*

ABSTRACT

We estimate how shocks to food and energy (fuel) commodity prices pass-through to food consumer prices in the euro area, where the current episode of substantial and persistent increase in food prices is unprecedented when looking at the past decades. We extend the workhorse food value-chain model of Ferrucci et al. (2012) to account for fuel prices and asymmetries. We show that there is a persistent and significant effect of shocks to food and energy commodity prices on food inflation that reaches a maximum at around 12 months after the shock. We also show that both types of shocks impact food consumer prices in an asymmetric way, with increases in prices having a significant, positive effect, while price decreases have a milder effect in the case of food commodities and a statistically non-significant effect in the case of energy commodities.

KEYWORDS:

• Food prices
• energy prices
• asymmetries
• euro area

JEL CLASSIFICATION:

• E31
• Q17
• Q18

Disclosure statement

No potential conflict of interest was reported by the author(s).

Author’s contributor

We thank Pablo Burriel, Ángel Gavilán, Corinna Ghirelli, Philip Lane, Florens Odendahl, Carlos Thomas, Alberto Urtasun and seminar participants at Banco de España and the Eurosystem’s Working Group on Forecasting for their comments. At the time of writing this paper Águeda Gras-Miralles was on an internship at Banco de España. The views expressed in this paper are those of the authors and do not necessarily represent the views of the Banco de España or the Eurosystem. Corresponding author: Javier J. P’érez: Banco de España, Calle Alcalá, 48, 28014, Madrid, Spain. (mailto:[email protected])

Notes

¹ The reference food index is an aggregate of six food groups: cereals, dairy, meat, fats and oils, sugar and coffee. EU food commodity prices’ main source is European Commission’s DG-Agri. Each food group is the simple average of its subcomponents.

² For the analysis we exclude the most volatile elements, namely fruit and vegetables, and also fish due to the lack of an EU reference commodity.

³ Due to data shortages, the fuel price is a GDP weighted index of agricultural motor fuel prices in Germany, France, Italy and Spain.

⁴ The results for each food category are available from the authors upon request.