Food Inflation Dynamics in a Pacific Island Economy-A Study of Fiji: Causes and Policy Implications

There has been great concern about rising food inflation in recent years in Fiji and the rest of the Pacific island countries, as evidence by wide discussions in the public and political arena. It is estimated that food price inflation accounts for about 35 percent of the total consumer price index in Fiji and has been constant over the years. The extant studies mostly focused on headline inflation and there is no specific analysis of food inflation in the Pacific Island context. Accordingly, this paper examines the determinants of food inflation in Fiji. Based on the available data, the study develops two inflation models: (i) domestic factor model and (ii) external factor model for Fiji. The analytical framework adopts the bounds testing procedure within the Autoregressive Distributed Lag model that is appropriate for small sample estimates and provides both the short-run and long-run impacts. The study uses annual data for the period 1983 to 2018. The analysis shows the presence of a long-run cointegration relationship among the variables in the two models. The empirical estimation reveals that domestic factors such as per capita GDP and money supply positively affect food inflation. The agriculture credit is inversely interrelated to the food inflation in Fiji. Unexpectedly, the negative effect of the domestic food production index is found to be insignificant on food inflation, indicating the low production of food products. The external factors such as oil price, exchange rate, world food price, and food import also play a significant role in positively influencing food inflation in Fiji. Relatively, the results indicate except for the exchange rate, domestic factors appear to play a more dominant role in food inflation dynamics. These findings have important implications in national policymaking. For a small developing island economy that is dependent on imports, where about half of the population are in poverty and has huge agricultural potential, there needs to be greater policy coordination in domestic policy objectives to swiftly curb food inflation. In the long run, systematic supply-side reforms and improving access to financial support to the key sector like agriculture is critical, besides infrastructure investment and research and development.