International food commodity prices and missing (dis)inflation in the euro area

Working Paper N° 350

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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 exoge-
nous 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 in-
ternational food prices contributed significantly to the twin puzzle of missing disinflation
and missing inflation in the era after the Great Recession. Specifically, without disrup-
tions 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 trans-
mission 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.