Sources of Recent Inflationary Pressures and Interlinkages between Food and Non-food Prices in Ethiopia

Ethiopia has experienced rampant inflationary episodes over the last couple of decades, indicating the need to identify the key driving forces behind such inflationary spirals. As such, this study investigates the main sources of recent inflationary pressures during the period 1999Q1-2019Q4 using linear and non-linear Auto-Regressive Distributed Lag (ARDL) Models. The study also assesses the interlinkages (pass-through effects and causality) between food and non-food prices with the help of Dynamic Ordinary Least Square (DOLS) estimation and Toda Yamamoto granger Causality approach. The main findings of the study indicate that inflation expectation, money supply growth, world food price, domestic real income and food supply are found as the main short run and long run drivers of food inflation. While, non-food inflation appears to be mainly determined by expected inflation, exchange rate, administered price and world non-food price level. The results further reveal the asymmetric effects of exchange rate, real GDP (in the long run), world price, and food supply on overall inflationary process. On the other hand, evidence of second-round effects between food and non-food prices is confirmed although a strong and long-lasting effect comes from food to its non-food counterpart. The granger causality test results also support a two-way causality between the two price groups. After all, this study suggests recognizing the specific behaviors and sources of food and non-food prices and considering the transmission effects between each other so as to effectively control the underlying inflationary shocks and maintain price stability in the economy.