Discussion of “Food Price Pass-Through in the Euro Area: Non-Linearities and the Role of the Common Agricultural Policy”

The link (or lack of link) between food commodity prices and consumer prices is an important issue not only for academics but also for policymakers. This paper asks how and to what extent changes in food commodity prices spill over to consumer prices, using a new data set for the euro area as well as a new empirical approach. The authors find that there is a statistically significant link between food commodity prices and consumer prices, which is quite different from the findings of previous studies. The contributions of this paper can be summarized as follows. First, the paper makes a clear distinction between food prices in European Union (EU) internal markets (e.g., farm gate and internal prices of skim milk powder in a country belonging to the EU) and those in international markets (e.g., export prices of skim milk powder from the United States or Oceania). The paper uses the former prices to examine the link between food commodity prices and consumer prices. This is an important departure from previous studies, which typically use international food prices. The authors argue that the difference between internal and international food prices is, at least partially, accounted for by the presence of the Common Agricultural Policy (CAP) in the EU. For example, if the internal market price of a particular food item, such as skim milk powder, falls below a certain threshold level, then the EU authorities will buy up goods to raise the price to the threshold level. The paper finds that the discrepancy between internal and international food prices created by these interventions is not trivial, and argues that