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Asia-Pacific Sustainable Development Journal

The Asia-Pacific Sustainable Development Journal (APSDJ) aims to stimulate debate and enrich research in the formulation of policy in the Asia-Pacific region towards the fulfilment of the 2030 Agenda for Sustainable Development. The APSDJ seeks to provide a forum for the exchange of knowledge, experiences, ideas and analysis on issues concerning sustainable development across its economic, social and environmental dimensions. Published twice a year, the APSDJ is a rebranded journal of ESCAP that builds on the success of two earlier journals – the Asia-Pacific Development Journal (APDJ), being published since 1994, and the Asia-Pacific Population Journal (APPJ), in print since 1986. These journals are being merged in recognition of the interconnected and multidisciplinary nature of sustainable development.

English

Impact of food inflation on headline inflation in India

A commonly held belief in the 1970s was that price indices rise because of temporary noise, and then revert after a short interval (Cecchetti and Moessner, 2008). Accordingly, policy should not respond to the inflation because of these volatile components of the price indices. This led to the development of the concept of core inflation (Gordon, 1975), which is headline inflation excluding food and fuel inflation. It was strongly believed that in the long run, headline inflation converges to core inflation and that there are no second round effects (that is an absence of core inflation converging to headline inflation). In recent years, however, major fluctuations in food inflation have occurred. This has become a major problem in developing countries, such as India, where a large portion of the consumption basket of the people are food items. Against this backdrop, in the present paper, an attempt is made to measure the second round effects stemming from food inflation in India using the measure of Granger causality in the frequency domain of Lemmens, Croux and Dekimpe (2008). The results of empirical analysis show significant causality running from headline inflation to core inflation in India and as a result, the prevalence of the second round effects. They also show that food inflation in India is not volatile, and that it feeds into the expected inflation of the households, causing the second round effects. This calls for the Reserve Bank of India to put greater effort in anchoring inflation expectations through effective communication and greater credibility.

English

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