Global Commodity Inflation Pass-through: Vulnerability of Small Island Developing States

We examine the vulnerability of inflation in Small Island Developing States (SIDS) to global food and fuel inflation changes, drawing on a large panel of 168 countries, including 31 SIDS. Estimates using the local projections methodology of Jordà (2005) reveal that inflation in SIDS is nearly twice as responsive to international food commodity inflation shocks as in non-SIDS counterparts. There is also evidence of asymmetry in food inflation pass-through, with food-inflation increases having larger pass-through than equivalently sized food-inflation decreases. Results hold even in the presence of country-specific fixed-effects and other control variables, most notably the weight of food and oil in a country’s CPI basket, further strengthening the finding that there is something SIDS-specific leading to higher food inflation pass-through. In the case of shocks to international crude oil inflation, the disparity between SIDS and non-SIDS is less apparent. Our results can be interpreted as indicating that market structures, dependence on imports, and the health of supply chains impact food-inflation passthrough, and should thus be priority areas for policymakers in SIDS.