RELATIONSHIP BETWEEN ENERGY AND FOOD PRICES IN THE EURO AREA

Abstract

Over the past five years, global economic developments have been accompanied by a number of challenges. After a period of economic development, the global economy is facing a significant challenge caused by the COVID-19 crisis. There have been factory closures, border closures and supply chain disruptions. All this is reflected in the EU and the euro area. This was followed by a period of recovery and accelerating inflation. The war on the territory of Ukraine is also having a significant impact on inflationary processes. This further jeopardises the supply of energy resources and their prices begin to rise at a very high rate. The shock of rising energy prices has also been reflected in sharp increases in food prices. In the euro area, there have been periods when food prices have risen by more than 17% on an annual basis and energy products by almost 60% in some months. All these developments highlight the need to examine the links between energy and food prices. This is necessary in order to be able to take quick decisions in the event of new volatility in energy prices. The aim of the study is to establish a causal relationship between the dynamics of energy and food prices and the time lag over which food prices react to increases in energy prices. A correlation analysis is carried out and a causal relationship between the two indicators is established by regression analysis at different time lags. The hypothesis tested is that, over the last five years, there has been a strong month-to-month correlation between energy prices and food prices with a lag of six months. For the purpose of regression analysis and hypothesis testing, monthly data for food inflation and inflation for the group Electricity, gas and other fuels have been used. The data are taken from the structure of the Harmonised Index of Consumer Prices published by Eurostat. The detailed regression analysis shows that there is a statistically significant linear relationship between the price indices of the two product groups with a lag of six months. The Granger causality test confirms the results of the dynamic, correlation and regression analysis. The results of the test show not only the existence of a causal relationship, but also the ability of energy price changes to predict food price dynamics. All this leads to the conclusion that in periods of significant changes in energy prices, food prices can be expected to follow similar dynamics within six months. This relationship could be used both for forecasting and for taking specific economic measures.