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Abstract
Food prices traditionally have an impact on inflation around the world. Movements in these
prices are coming more from the supply side, then from the demand side. If treated as a
supply shock, monetary policy should not react. However, food prices are part of headline
inflation that is an official target for most central banks. Serbia conducts Inflation targeting
and faces serious challenges with food price volatility. Food price volatility in Serbia hampers
inflation forecasting, and may have a negative influence on inflationary expectations and
public confidence in (i.e. credibility of) the Central bank, all of crucial importance for success
of Inflation targeting. There are several important possible improvements that may decrease
volatility of food prices but also limit negative impact of food price volatility on Consumer
Price Index (CPI) as a measure of inflation. These improvements are very important for
success of Inflation targeting in Serbia.