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Developing a price warning indicator as an early warning tool - a compound growth approach

The food price surge in global markets in 2007-2008 and then again in 2011, has spurred a lot of interest in creating an early warning indicator to detect abnormal growth in prices in consumer markets in the developing world, where advance warning of an impending food crisis can be critical. In these countries, on an early warning basis, sometimes market prices are the only source of information available to assess the severity of a local shock to either access or availability of food. Because prices summarize information held by a large number of economic agents, including their expectations regarding likely short-term developments in supply and demand, they are ideal to use as the basis of an early warning indicator. The objective of this paper is to present the methodology for an indicator of price anomalies recently developed by the Global Information Early Warning System of FAO that can be used to identify abnormal price changes. The FAO/GIEWS indicator of price anomalies (IPA) relies on a weighted compound growth rate that accounts for both within year and across year price growth. The main advantage of the IPA is its’ simplicity. It can be used in different markets without concern as to whether or not the market year has been well defined. The indicator directly evaluates growth in prices over a particular month over many years, which allows one to answer the question of whether or not a small change in price is normal for any particular period.

Felix G. Baquedano