The header is not a typo. I happened to find the link to a Bloomberg news-item on how Bank Indonesia (central bank of Indonesia) is trying to assist farmers to increase their yield, productivity, etc., so that food prices are kept in check and hence, overall inflation in check, allowing monetary policy more room to support credit growth and economic growth, etc. Interesting perspective. If I remember correctly, I picked up the link from a tweet by Andy Mukherjee.
My friend Manu Bhaskaran was neither amused nor pleased with this story. He correctly noted that a central bank’s job is to attend to short-term demand management through monetary policy. Supply side bottlenecks are a job to be fixed by other organs of the government. Second, food prices are relative prices. Central bank has to respond to overall price level increases. Third, he said that distribution bottlenecks that add to price levels of food items are not the cause of inflation. They may permanently elevate prices but that they would add little to annual changes in inflation as the base effects will wash out.
All fair points. We ‘back-and-forth’ed. I felt that the problem in developing countries is that competence is not uniformly spread or available in government. It is not unusual for some institutions of governance to be isolated centres or islands of (relative or absolute) competence. Hence, notwithstanding domain confusion or mission creep, one competent institution might end up doing more than its remit. That could be happening with Bank Indonesia.
Second, food prices are more important for developing countries than for developed countries. They constitute the bulk of household consumption. Hence, what they see and feel in their wallets, thanks to food prices, will filter through to other prices more easily and also to inflation expectations. Hence, strictly speaking, while food price increase constitutes an increase in the relative price of one set of consumption items, its impact may be more general, particularly in developing economies.
On distribution inefficiencies affecting price levels as opposed to changes in prices, the point is well made. However, here the question is one of increasing the economy’s overall efficiency and hence improving potential non-inflationary growth rate of the economy. Second, if distribution costs add a permanent 0.4% to 0.5% to the inflation rate per annum, to that extent, they help to perpetuate higher (than otherwise) inflation expectation.
So, a stimulating exchange for which I need to thank Manu for his emails that pushed me to think harder.