Food Price Crisis in Indonesia: Alert from the Key Markets

Food price variations can be very costly when they abrupt and unanticipated. In the current new era of market uncertainty, monitoring food prices become highly important to foresee any potential crisis. This study proposes an alternative approach in monitoring food price movements in many different markets within a country by focusing only on the key markets. Using monthly retail rice prices from the 25 major markets in Indonesia, we identify the key markets whose price movements can help to forecast price movements in all other markets. The key markets are identified using granger causality tests conducted in the vector error correction model framework. The relevance of monitoring the key markets in detecting price crisis is tested using Probit and Poisson models. We found that albeit not all of alert phases lead to crises, monitoring the key markets can help to forecast price movements in all markets across the country.