Food Inflation and Inflation Dynamics in Bangladesh

The paper examines the role of food price increase in overall inflation in Bangladesh using econometric analysis of time series data. While the direct impact of food price is quite obvious because of its high share in overall price indices, the paper focuses on the second round impacts of food inflation on non-food and overall inflation. As opposed to usual perception that food price shock is transient in nature, the paper finds that shocks in food inflation has been at least as persistent as that of non-food inflation. More importantly, food inflation might transmit to non-food inflation. Granger causality test suggests that food inflation causes non-food inflation. Food inflation may create a pressure on wage inflation as well. These indirect effects of food inflation may propagate the overall inflation further. Monetary authority should be cautious in formulating monetary policy based on core inflation as it understates the underlying inflationary pressure in the economy; rather current practice of considering moving average of headline inflation may perform better in formulation of monetary policy in Bangladesh.

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