Rising Food Prices Put Pressure on Central Banks in Developing Countries

EconEye Admin

9 months ago

Rising food prices are a particular concern for central banks in developing countries, where food makes up a larger share of household budgets. —ft.com

Answer the following questions to check your understanding of the story.

1) What does the information that food makes up a larger share of household budgets in developing countries tell us?

a) A family living in a developing country spends more on food than a family living in an advanced economy.

b) The weight of food in the CPI basket of developing countries is larger than in advanced economies.

c) We can’t compare inflation rates in developing countries and advanced economies because the CPI baskets are different.

d) The CPI in developing countries is inaccurate.

Wrong! - Can a family in a developing country spend a larger share of its budget on food without spending more money on food than a family in an advanced economy? Can we compare inflation rates in developing countries and advanced economies? Is the CPI in developing countries inaccurate?

That's Right! - The Consumer Price Index basket consists of goods and services, each weighted by its relative size in an average consumer’s budget.

An average household in a developing country spends a greater percentage of its budget on food than the average household in an advanced economy, so the weight of food is greater in the CPI basket of developing countries than in advanced economies.

2) Why are rising food prices a particular concern for central banks in developing countries?

Rising food prices ____________.

a) increase the CPI and the inflation rate at a faster pace in developing countries

b) create hyperinflation because of the large food weight in the CPI basket

c) create a commodity substitution bias that makes the CPI inaccurate

d) require the CPI basket to be updated more frequently in developing countries

Wrong! - What is hyperinflation? Do rising food prices require the CPI basket to be updated more frequently? Is the commodity substitution bias large enough to consider the CPI inaccurate?

Correct! - Rising food prices increase CPI and the inflation rate at a faster pace in developing countries because food has a greater weight in the CPI basket. This worries central banks, whose primary goal is to keep inflation under control.

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