Volatile Volatility: Conceptual and Measurement Issues Related to Price Trends and Volatility

Abstract

In the 1990s, policy debates focused on global price levels and whether they were too low. The last two food price spikes in 2008 and 2011 have led to renewed concerns about the impacts of high prices and shifted the focus back on food price volatility. The effects of price trend changes on food production and food consumption (a discussion about price levels) are different from the effects of volatility changes around those trends (cycles and extreme events), but both aspects are related. This chapter argues that the analysis of those issues may benefit from differentiating between trends, cycles, and shorter-term events, including spikes and busts. Then it expands on several methodological and data issues related to how those concepts are defined and measured. This chapter concludes that while the price shocks of 2008 and 2011 focused the attention of the public and policymakers on price volatility, the decomposition of trends, cycles, and shorter-term volatility also suggests the need to find out whether price variations respond to cyclical and shorter-term movements or whether they result from a changing trend reflecting adjustments in long-term fundamentals that need to be properly understood.