Abstract

Food prices are excluded from core measures of inflation in many countries assuming food prices are transitory.Exclusion of food prices may lead to information loss, leading to higher inflationary expectations, a downwardbias to forecasts of future inflation and lags in policy responses. Assumption that log food price series behave byway of I(1) and differenced log food price series linger in the manner of I(0) process leads to modelmisspecification. Correct identification of the memory in the food price series is vital for the correct modelspecification and is important for policy makers. This study aims to examine whether food price inflation istransitory in Sri Lanka by estimating the memory properties of food price series using non-parametric,semi-parametric and parametric tests. The study covers the period from January, 2003 to December, 2013.Results show that food price inflation, nonfood price inflation and headline inflation, and global food priceinflation series are fractionally integrated. Food price series in Sri Lanka commoves with global food prices.Research findings show that food price inflation is not transitory, long memory series. The outcomes of thisattempt have consequential implications towards food policy, trade policy and monetary policy makers. Thesefindings suggest that neglecting food prices may render the core inflation measure a biased measure of long runinflation.

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