Abstract
High food prices are one of the major risks facing households from developing countries. Food prices have attracted renewed interest among policy experts in identifying appropriate policy instruments to counter the effect of price vulnerability. This paper evaluates the effect of fuel prices on food prices by testing for Granger causality and cointegration applied to diesel, maize, beans, cabbage, and potatoes price data for the period 2010-2018. The results revealed a unidirectional Granger causality running from diesel prices to cabbage and potatoes prices but there was no causal relationship with maize and beans prices. The findings suggest that there is a long-run price relationship between perishable foods and fuel prices with an increase in the price of diesel resulting in a significant increase in the price of cabbages and potatoes. The study recommends a policy of cushioning an increase in food prices by introducing a tax relief once the fuel price hits a certain level.Keywords: Food prices, Fuel prices, Cointegration, Granger causalityJEL Classifications: Q48, Q43, Q13DOI: https://doi.org/10.32479/ijeep.10600
Highlights
Households in developing countries are increasingly facing high food prices
Food prices were obtained from the Kenya National Bureau of Statistics (KNBS) while diesel prices were obtained from the Energy and Petroleum Regulatory Authority (EPRA)
This article analyses the possible relationships between fuel and food prices in Kenya
Summary
Households in developing countries are increasingly facing high food prices. This has a negative effect on their consumption and investment patterns. Postproduction, changes in oil prices, and eventually fuel prices can lead to changes in the prices of food products due to the changes in transport costs. This has raised the suspicion that an increase in oil prices will lead to changes in production and transport costs and this will trickle down to the farm output and overall profitability of an agricultural venture (Dillon and Barrett, 2016). The effects are often mitigated through subsidies and other policies that help cut down some of the costs (Gardebroek and Hernandez, 2013, Nzuma, 2013)
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