International food commodity prices and missing (dis)inflation in the euro area
Working Paper N° 350
This paper examines the causal eﬀects of shifts in international food commodity prices on euro area inﬂation dynamics using a structural VAR model that is identiﬁed with an external instrument (i.e. a series of global harvest shocks). The results reveal that exogenous food commodity price shocks have a strong impact on consumer prices, explaining on average 25%-30% of inﬂation volatility. In addition, large autonomous swings in international food prices contributed signiﬁcantly to the twin puzzle of missing disinﬂation and missing inﬂation in the era after the Great Recession. Speciﬁcally, without disruptions in global food markets, inﬂation in the euro area would have been 0.2%-0.8% lower in the period 2009-2012 and 0.5%-1.0% higher in 2014-2015. An analysis of the transmission mechanism shows that international food price shocks have an impact on food retail prices through the food production chain, but also trigger indirect eﬀects via rising inﬂation expectations and a depreciation of the euro.