Rising Market Concentration and the Decline of Food Price Shock Pass-Through to Core Inflation

39 Pages Posted: 24 Jun 2019

See all articles by Jason Brown

Jason Brown

Federal Reserve Bank of Kansas City

Colton Tousey

Federal Reserve Bank of Kansas City

Date Written: June 13, 2019

Abstract

Using a vector autoregression that allows for time-varying parameters and stochastic volatility, we show that U.S. core inflation became 75 percent less responsive to shocks in food prices since the late 1970s. The decline in the pass-through of food price shocks to inflation is a result of a decline in both volatility and the persistence of food price changes in inflation. This decline in pass-through coincides with a period of increasing concentration in the food supply chain, especially among U.S. grocery retailers and distributors. We find that 60 percent of the variation in pass-through over the last four decades can be explained by changes in food retailers and distributors market concentration. Controlling for the composition of the food basket and inflation expectations explains an additional 20 percent of the variation. Our results suggest that if the market concentration of food retailers and distributors continues to increase and inflation expectations remain well-anchored, the pass-through of food price shocks to inflation will likely remain subdued.

Keywords: food prices; inflation; time-varying parameters

JEL Classification: E31, E52, Q11

Suggested Citation

Brown, Jason and Tousey, Colton, Rising Market Concentration and the Decline of Food Price Shock Pass-Through to Core Inflation (June 13, 2019). Federal Reserve Bank of Kansas City Working Paper No. 19-02, Available at SSRN: https://ssrn.com/abstract=3409441 or http://dx.doi.org/10.2139/ssrn.3409441

Jason Brown (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Colton Tousey

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
12
Abstract Views
255
PlumX Metrics