Food Price Inflation Rates in the Euro Zone: Distribution Dynamics and Convergence Analysis

Angelos Liontakis

doi:10.1155/2012/868216

Abstract

It is widely recognized that inflation as a monetary phenomenon is determined by money supply changes. In the short run, however, several factors may lead to inflation rate differentials among different regions in the same country or among different countries in a monetary union. This paper examines the mean reversion attitude of food price inflation rates in the Euro zone, borrowing the concepts and developments from the recent growth literature and using panel unit root tests. Additionally, in order to capture sufficiently the evolving distributional dynamics, nonparametric econometric methods are also implemented. Finally, the comovement of the inflation rates among different food subgroups is also explored. The data consist of monthly observations of the EU harmonized consumer price indices of food and three different food subgroups (meat, bread and cereals, and vegetables) for the 12 older member states of the Euro zone, covering the period from 1997 to 2010. The results do not fully support the hypothesis of the food price inflation rates convergence for the whole period under investigation. Mean reversion shows up in different time periods and in different food categories. Moreover, the analysis of distribution dynamics sheds light to different aspects of convergence and highlights processes like club formation and polarization.

Highlights

The subject of inflation rate convergence gained the attention of economists due to its importance for monetary and regional policies
The data used consists of monthly estimates of the Harmonized Indices of Consumer Prices (HICPs) for the “food” group and for three specific subgroups, namely, “bread and cereals,” “meat,” and “vegetables.” The data set covers a period from January 1997 to November 2010
The values of ρ’s and the corresponding half-lives are only reported in cases where the unit root hypothesis is rejected at a 95% level of significance

Summary

Introduction

The subject of inflation rate convergence gained the attention of economists due to its importance for monetary and regional policies. Homogeneous inflation is expected to prevail due to the increased economic integration after the formation of the single currency area. Inflation rates and their convergence within the Euro area have been a major concern for policy makers, even before the advent of the single currency ([1, 2]). Inflation alignment within the Euro zone is directly related to the relative price competitiveness of each country ([4,5,6,7]). The recent financial crisis and its strong impact on several Euro zone countries with higher inflation rates have strengthened the interest towards this direction

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Results

Conclusion