Oil Price Pass-Through on Food and Non-Food Inflation in Ethiopia
Abstract
This study sought to investigate the inflationary impact of international oil price on inflation in Ethiopia. It mainly focused on the impact of fluctuations in international oil prices on food and non-food inflation, to estimate the degree of international oil price pass through into inflation and lastly to draw policy implications for controlling domestic inflation. The study was based on the Cost Push Inflation theory. The study tested for cointegration and employed VECM for food CPI and OLS for non-food CPI. The study found a negative and significant relations for changes in food CPI and changes in lag (2) and (3). Further, the study established a positive and significant relationship between change in food CPI and change in oil prices lag (1) and (2). In addition, oil prices positively and significantly affect non-food CPI from the study findings. The study observed the existence of partial pass- through effect of oil prices on food and non-food CPI. Based on the findings, fluctuations in international oil prices have a direct and significant impact on food and non-food CPI in Ethiopia in the short run. This implies that there is need for the Ethiopian government to formulate policies aimed at controlling inflation for both food and non-food CPI since it has a direct impact on people. Majority of the existing studies have focused on only food but leaving out non-food CPI. This study filled the gap by identifying the magnitude of the oil prices pass-through to domestic price for both food and non-food CPI.
Keywords: Oil Price, Food and Non-Food Inflation & Ethiopia.
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