Sources of recent inflationary pressures and interlinkages between food and non-food prices in Ethiopia

Abstract

This study investigates the main sources of recent inflationary pressures from 1999Q1 to 2019Q4 using linear and non-linear Auto-Regressive Distributed Lag (ARDL) Models. It also examines the pass-through effects and causality between food and non-food prices using Dynamic Ordinary Least Square (DOLS) estimation and Toda-Yamamoto Granger Causality approach. The main findings of this study indicate that inflation expectation, money supply growth, world food price, real income, and food supply are found as the main short-run and long-run drivers of food inflation. While, non-food inflation appears to be mainly explained by expected inflation, exchange rate, administered price, and world non-food price level. The results further reveal that exchange rate, real income, world price, and food supply have asymmetric effects on the overall inflationary process. On the other hand, evidence of second-round effects between food and non-food prices is confirmed although a strong and long-lasting effect comes from food prices. The Granger causality test results also support a two-way causality between the two price groups. After all, this study suggests considering the specific behaviors and sources of food and non-food prices, as well as the transmission effects between them so as to effectively control the underlying inflationary shocks and maintain price stability in the economy.