The Role of Food Price Inflation in Lesotho

This dissertation analyses the role of food price movements in inflation within the Lesotho's economy. The empirical results from this analysis reveal that food price inflation in Lesotho has generally not only been more volatile and higher than nonfood inflation, but also more persistent than the inflation of nonfood products. Furthermore, the persistent movements in food prices have appeared to be the major source of increasing inflation persistence in Lesotho, which was found to be low but rising over time. Food price movements are also discovered to have significant impact on core inflation, thereby giving evidence that food prices contain some useful information about the underlying inflation trends in Lesotho. On the other hand, the results have shown the presence of strong second-round price effects between food and nonfood inflation. These findings, therefore, implies that the setting and communication of monetary policy in Lesotho should be based on developments in underlying inflation rather than overall inflation However, any attempt to capture the underlying inflation using measures that excludes food items only on the basis of their high volatility would be unjustified.