Asymmetric Impacts of Rising Food Prices on Households’ Welfare in South West Ethiopia

Abstract

Food price inflation affects household welfare and the macroeconomy pervasively. The study estimated Quadratic Almost Ideal Demand system of six food groups to simulate the money costs of food prices inflation on households’ welfare and; predict relative potency of income and price policies to counter the effects in a particular context of South West Ethiopia. It drew on Household Income and Consumption Expenditure Survey data of 519 households collected by the Central Statistical Authority of Ethiopia. Rural households respond more to income and prices than do urban dwellers. The welfare losses from food price inflation fall heavily, more on urban households than their rural counterparts. On average, it requires resource allocations as large as percentage increases in prices to keep households’ welfare at pre-price change levels. It is suggested that a sector-specific mix of income and price policies could offset the negative consequences on consumers’ welfare.