Dynamics of Food Price Inflation and Its Determinants in Ethiopia: ARDL Approach to Con Integration

Abstract

The inflation picture is more heterogeneous in transition and developing economies. In Ethiopia, the year-on-year food inflation has increased by 42.0 percent in September 2021 as compared to the one observed in September 2020. The main objective of this study is to investigate the dynamics of food price inflation and its determinants in Ethiopia. For data analysis autoregressive distributed lag (ARDL) to con-integration model was used. The results suggested that food price inflation appears to be strongly significant and positive in explaining current food inflationary pressures in the short-run and negative in the long run. In effect, a one percent rise in food prices in the previous year causes the actual food prices to increase in short-run and declines in the long-run. These results emphasized the importance of inflation inertia and persistent price-price spiral movement in Ethiopian food price dynamics. Money supply positively influenced food price inflation growth in the short-run and in long-run. In the same way, the exchange rate influenced food price inflation positively in the short-run and long-run. Food inflation is also negatively influenced by real gross domestic product in US Dollar in both the short-run and long-run. In the same way government budget deficit and general consumer price index affected food price inflation significantly. Therefore, as policy recommendation, policy makers need to take appropriate measure to follow tight monetary policy and find the right balance between money demand and economic growth when needed without over-pumping money into the economy which causes inflation. As it is inferred from the research work the influence of exchange rate on food price is for both the short-run and long-run so that the government needs to focus on the way to control instability in exchange rate by devising a right macroeconomic policy to constrain the upward spiral movement of food price inflation. In regarding budget deficit and general consumer price index, the right decision to stabilize the country’s economy by the government is required. Keywords: Food Price Inflation. Dynamics, ARDL, Con integration DOI: 10.7176/JESD/13-21-03 Publication date: November 30 th 2022