How Will the Food Price Shock Affect Inflation in Latin America and the Caribbean?

22 Pages Posted: 7 Jun 2011

See all articles by Eduardo A. Lora

Eduardo A. Lora

Inter-American Development Bank (IDB) - Research Department

Andrew Powell

Inter-American Development Bank (IDB); Universidad Torcuato Di Tella - School of Business; Harvard University - Center for International Development (CID)

Pilar Tavella

affiliation not provided to SSRN

Date Written: April 2011

Abstract

There is widespread concern that recent increases in international food prices may have significant effects on domestic food prices and inflation. This note assesses the impact of the recent food price shock on food, non-food and consumer inflation in the countries of Latin American and the Caribbean (LAC). Vector Autoregressive Regressions (VARs) are estimated for each country to trace the effect of international food prices, the price of oil and the value of the US dollar on domestic prices. The results are then used to calculate the potential impact of higher food prices and to project the expected rise in domestic prices to the end of 2011 and beyond, given the actual increase in food prices until February 2011. It is concluded that, due to the food price surge, increases in inflation could exceed 5 percentage points in Bolivia, Dominican Republic, Guatemala and Honduras unless additional policy actions are taken. In some countries with flexible exchange rate systems, such as Brazil, Colombia and Mexico, currencies tend to appreciate as a response to higher food prices and as a result the impact on domestic prices is muted. However, there is no simple pattern of differences between floaters and fixers; the speed and extent of pass-through is quite heterogeneous and dependent on factors such as the importance of food in the overall inflation index and local policy measures.

Suggested Citation

Lora, Eduardo A. and Powell, Andrew P. and Powell, Andrew P. and Tavella, Pilar, How Will the Food Price Shock Affect Inflation in Latin America and the Caribbean? (April 2011). IDB Working Paper No. IDB-PB-120, Available at SSRN: https://ssrn.com/abstract=1858035 or http://dx.doi.org/10.2139/ssrn.1858035

Eduardo A. Lora (Contact Author)

Inter-American Development Bank (IDB) - Research Department ( email )

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Andrew P. Powell

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Universidad Torcuato Di Tella - School of Business ( email )

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C1428BIJ Buenos Aires
Argentina
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+5411 4783-3220 (Fax)

Harvard University - Center for International Development (CID) ( email )

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Cambridge, MA 02138
United States

Pilar Tavella

affiliation not provided to SSRN

No Address Available

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