Food, Fuel, and Facts: Distributional Effects of Global Price Shocks

Saroj Bhattarai, Arpita Chatterjee () and Gautham Udupa ()
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Arpita Chatterjee: University of New South Wales
Gautham Udupa: CAFRAL, Reserve Bank of India

No 2024-03, Discussion Papers from School of Economics, The University of New South Wales

Abstract: Exogenous global commodity price shocks lead to a significant decline over time in Indian household consumption. These negative effects are heterogeneous along the income distribution: households in lower income groups experience more adverse consumption effects following an exogenous rise in food prices, whereas households in the lowest and the two highest income groups are affected similarly following an exogenous rise in oil prices. We investigate how income and relative price changes contribute to generating these heterogeneous effects. Global food price shocks lead to significant negative wage income effects that mirror the pattern of negative consumption effects along the income distribution. Both global oil and food price shocks pass-through to local consumer prices in India and increase the relative prices of fuel and food respectively. Expenditure share of food increases with such a rise in relative prices, which provides unambiguous evidence for nonhomothetic preferences. Using the expenditure share responses together with theory, we show that food, compared to fuel, is a necessary consumption good for all income groups.

Keywords: Global Price shocks; Food prices; Oil prices; Inequality; Household heterogeneity; Household consumption; Necessary good; Non-homotheticity; India (search for similar items in EconPapers)
JEL-codes: F41 F62 O11 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2024-04
New Economics Papers: this item is included in nep-agr, nep-ene, nep-ifn, nep-int and nep-opm
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Working Paper: Food, Fuel, and Facts: Distributional Effects of Global Price Shocks (2024)
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