Inflation Dynamics and Agricultural Supply Shocks in Uganda

Studies on inflation earlier in Uganda did not fully account for the potential role of supply side constraints in agriculture. This paper's purpose, therefore, is to estimate the determinants of inflation in Uganda. It highlights the possible feed through effects emanating from supply shocks in the domestic agricultural sector. Such studies tended to model inflation as emanating from the demand side through disequilibrium in the money and external markets. Only Kihangire and Mugyenyi (2005) and more recently Kabundi (2012) have tried to model Uganda inflationary processes taking into account shocks to the agricultural sector. While Kihangire and Mugyenyi (2005) used rainfall data as a proxy for the agricultural supply shocks, Kabundi (2012) used cereal production as a proxy for agricultural output. These approaches provide good insights into the potential role of agricultural output variability to inflation, but they are not without flaws: the agricultural output gap can arise for other reasons other than rainfall – for example crop failure may arise due to covariate pests or hailstorm shocks. Moreover, the relationship between rainfall and agricultural production may be nonlinear, implying that more than “optimal” rainfall may be detrimental to agricultural production.