[3]. Hence, a further study to identify the real causes of food inflation is still essential [4]. 
In Ethiopia, inflation was not a concern until 2002/03 [5], but afterwards began to increase at an alarming rate. For instance, the annual average food inflation rate between July 2011 and June 2012 was 36.9% and in October 2012 compared to October 2011 was 30.4% [6]. Several factors have been claimed for the soaring food inflation of Ethiopia. As reported by the Ethiopian CSA [7] the cause of food inflation during the period from June 2007 to June 2008 was export of food items. Monetary developments are seminal factors for high food inflation in Ethiopia [8]. Increase in aggregate demand is the preceding reason for food inflation due to high demand for food [9]. On the other hand, internal and external factors such as international commodity price increase, enticing economic performance, increase in money supply and injection of cash into the rural economy, behavioural changes in farmers, and local purchase increment by institutions and agricultural cooperatives are accountable for the recent inflation [10]. Alarming increase in demand, poor harvest, higher fertilizer, transportation costs; and world oil price hiking are also mentioned as major causes for food price inflation [11]. However, there is no agreement between academicians, researchers and the government on the real factors responsible to the hiking price of food items in the nation [4]. To continue the envisaged economic growth, searching for the real causes of inflation is a first step one has to do in order to propose an outright solution to the problem.

Inflation is erosion in the purchasing power of money, a loss of real value in the internal medium of exchange and unit of account in the economy [12]. High and increasing food prices pose a significant policy challenge particularly in developing countries where the share of food in household income is relatively high [13]. Inflation is one of the multifaceted challenges that the Ghanaian economy have been encountering for a very long time in spite of the numerous economic policies that have been formulated to neutralize its existence. It is indeed imperative to research for effective and efficient measures to curb inflation in order to sustain development and increase economic growth [14].
The concern with inflation emanates not only from the need to maintain overall macroeconomic stability, but also from the fact that inflation hits the poor particularly those who do not possess effective inflation hedges. Inflation injects noise into the price system, makes long-term financial planning of the country more complex phenomenon. Rapid price rise now-a-days is at the top agendum of the international community. People developing countries particularly are highly exposed to food insecurity as they are financially incapable to afford basic food crops. High inflation has been the most adverse economic shock that has continued to adversely affect Ethiopian economy where significant proportion of households had to adjust their consumption in response [15]. 
Successive inflation would automatically increase living cost of households in poor countries in which the society has not buffered stock. Because of higher food inflation, households have to make reductions in some areas of their consumption leading to malnutrition. 
High inflation erodes benefits of growth and leaves the poor worse off [16]. It hurts the poor more, since more than half of the budget of low wage earners goes toward consumption. It redistributes income from fixed income groups to the owners of assets and businessmen and increases the gap between rich and poor [17]. Relative strength of the impact of this macroeconomic problem also crucially depends on the share of imports in domestic demand, which is positively correlated to price transmission [2]. Though there are plenty of researches done in connection with inflation in both national and international level but they did not address co-integration of domestic inflation with the world and regional levels. They also do not address the issue of integration between the world and local markets. Based on these circumstance this study had tried to examine whether the domestic inflation has co-integration with the world level inflation or not. Specifically it had tried to assess trend of Ethiopian inflation, examine co-integration of domestic inflation with the world inflation and world oil price, and identify macroeconomic factors that aggravate domestic inflation.

The research used secondary series data, which were compiled from CSA, NBE, IMF and world development indicator (WDI) of World Bank. It covered time interval of 1981-2012. The interval covers more than 30 years, which is enough to apply times series analysis both in the long and short run methodologies. Different scholars used time series data that were smaller than what this research considered. Time interval from 1990-2009 was considered to assess macroeconomic determinants of inflation in Ghana [14]. In the same logic [18] in 2011 used time series data runs from 2000-2011, which is very short period to say time series analysis and to apply the period based error correction model. Some of the variables may not be stationary at zero level of differencing or they may not be zero order integration. Then differencing of each value would be the solution in order to fulfill precondition of stationary. After differencing the non-stationary variables the research finally had left with 30 years data.
 (3)
Where: DI = Domestic inflation.
M2= Broad money supply.
GovEXP= Government expenditure.
EXR = Exchange rate. 
HHcon =Household consumption expenditure.
GDP = Gross Domestic Product.
WOP = World oil price at the international market.
WI = World inflation.
RI = Regional import.
For regressing the above equation Vector error correction model (VECM) was employed, which is a model appropriate to identify both short and long run determinants of inflation. At the same time the model could also help the research to analyze speed of adjustment of each deviation from the long run equilibrium. Co-integration relations among price indices were identified by applying Johansen’s co-integration tests, while potential causal relations were examined by employing Granger’s causality tests. Application of VECM could allow examining existence of short term adjustments and long-term dynamics. Unit root test was done for all the variables to identify non stationary at level and stationary at first difference. 

GDP: Difference in log of GDP per capita income would be incorporated in the regression to capture the economic conditions of the country in terms of business cycle and hence to capture the income- driven increase in demand for food. 
Government expenditure: Increment in government expenditure may result into dumping of huge money in the economy, which in turn leads to demand pull inflation due to increment in purchasing power of the society. 
Household consumption: Since it is source of demand pull inflation within the domestic economy this variable will be considered as an independent variable and it is expected that there will be significant and positive co-integration with both food and non-food inflation of the country.

Sub-Sahara African inflation: Inflation index of this region will be considered as one independent variable to observe its interaction with the domestic inflation.
Domestic money supply: It is one source of inflation as to the view of many scholars; especially demand pull inflation is directly sourced from it. 
World oil price: Since Ethiopia is dependent on foreign markets for its oil consumption global oil price inflation may highly affect domestic inflation as well as the whole economy. This is to account the derived influence of global oil prices on individual countries’ food prices.

In most of the times food inflation is higher as compared to the non-food one in the country. Given this, the larger share in overall inflation of the country is sourced from the food inflation as it was observed in 2002 and 2008 when there was drastic inflation. Monthly inflation of non-food items of the country was not as such oscillatory as compared to the food inflation (Figure 4).

Domestic monetary policy influences real activity of the country through an inflation-tax channel. These real effects are transmitted to foreign nations via fluctuations in real exchange rate. Under a flexible nominal exchange rate, inflation is a beggar-thy-neighbor policy. 
Under a flexible nominal exchange rate each country suffers a welfare loss when one inflates [1].
Transport costs associated with shipment of imported commodities within the country’s borders have to be distinguished from those incurred to ship commodities, domestically produced or not, to domestic consumption hubs. Exchange rate fluctuations can absorb or amplify price changes on international markets, as the national currency appreciates or depreciates vis-à-vis the currency in which commodities are traded [20]. A wide range of policy interventions affect the degree of correlation between international market prices and domestic consumers’ prices. Most important determinants of non- food inflation are inflation expectation, real money growth and interest rate, in order of their importance. Monetary growth leads increment in demand and, for a given supply of non-food items, leads to rise in non-food price [5].

Different researcher who had forward their findings argued that real income, interest rate, inflation expectations, exchange rate, international prices, administered prices, wages and food supply are the core short run determinants of inflation in Ethiopia. Growth in real income, interest rate and wages would fuel the demand and lead to rising prices for a given level of output while food supply growth serves to cool down the price pressures. The exogenous international prices and administered prices are also found to be significant [5]. Though there was identification of the determinants of domestic inflation by different scholars but they did not show interaction of world inflation and fuel price with that of domestic inflation. Here in this research there was consideration of regional prices and import values to observe whether they have integration with the domestic inflation or not? Thus, to have this co-integration this study considered the long and short run co-integration of the domestic inflation and other macro economic variables. 

The model result presented below showed that all of the variables considered in the regression affect the dependent variable significantly but in different directions. Some of the variables like, world oil price, government expenditure, money growth rate and imports from south Asia affect the dependent variable positively and significantly. From those variables the first two affect the dependent variable in both the long and short run operation in significant and positive direction (Table 5).
Successive increment of government expenditure has long run effect which means previous year increment of the expenditure would have positive effect on domestic inflation of the country. Due to huge dependency on imported items effect of world oil price on domestic inflation is very fast and one can say that short run inflation of Ethiopia can be imported type. 
Impact of household consumption expenditure showed reversed effect on the short run domestic inflation as compared to its long run effect. Consistently negative impact on domestic inflation is happening from import increment of North African countries. Both the short and long run effect of import increment of the country from different regions is consistent in affecting domestic inflation.
Given all the above, speed of adjustment of the deviation/ disequilibrium that results from change in one of the independent variables in the short run from the long run trend is not as such fast that is 33.6% per year, which means no full adjustment within one year.
 circumstance may result in having a cause and effect type of interaction between oil price and domestic inflation. The two inflations show upward movement in recent times though they exhibit a bit reduction after 2012. Thus, this circumstance may lead to a conclusion that Ethiopian inflation may have interaction with the world oil price. 
Both short and long run analysis showed that government expenditure of the country has positive and significant effect on domestic inflation since it has money injection effect on the economy. 
Each successive increment in government expenditure would have both production and inflationary effect on the domestic economy, which needs due concern to curve down the latter effect. Thus, there should be giving attention about the negative consequence of each economic policy before implementing policies like government expenditure and money supply increment within the country. 
World price increment has both short and long run significant effect on domestic inflation. Having this, the country is highly dependent on imported manufactured items indicating that each and every increment in the world price of those items especially oil would result into huge crisis. Ethiopia purely dependent on imported oil in which imported inflation would have both social as well as economic impact unless there should be shifting from this source of energy. An important role in the process of inter-nationalization of economic relations is played by the world market. It may be viewed from many different angles, on the one hand, world market is used by individual countries as a device to mitigate their internal problems, and on the other, it can be a “transmission belt” for unfavorable economic circumstances happening on at world scale. This is also true of inflation, which affects all the countries in the contemporary world. Given this, world level inflation has positive long run effect on the domestic inflation of Ethiopia, which implies that there should be having due attention by policy makers to take into account in their policy analysis if there is price movement in the world market. Currently Ethiopia is importing huge amount of merchandise from different direction of the world, which would directly aggravate the domestic inflation in the short run. This circumstance is shown in the previous two regression results, in which the short run model result showed that imports of manufactured products from South East Asian countries has positive effect but long run effect of them is in the reverse direction. Based on regression result of the long run model all type of imports has negative effect on the domestic inflation of the country. Due to substitution effect in the commodities imported from African countries that has similar products for their export to Ethiopia, the inflation in those countries has negative short run effect on domestic inflation of the country. In contrast to this, imports from south East Asian countries like China has positive and significant effect on the domestic inflation, since the products imported from them are more of manufactured type and they are intermediate inputs for further production and investment of the country. This condition would result into cost push inflation within the domestic economic system of the country. Based on short run regression result speed of adjustment of each deviation in equilibrium from the long run trend line is not as such fast enough that is 33.6% in one year and it will completely converge to its long-run equilibrium in around three years. If there is unexpected shock in the economic system that result a change in the equilibrium trend of the inflation, then the system is not active enough to come down to its long run equilibrium within a year. Besides to numerical value of the error correction term, which is lower than 100%, one can see the impulse response of domestic inflation level to changes in the oil price shock in which the vibration continuous for longer periods though there is successive reduction in each bounce. Exchange rate fluctuations can absorb or amplify price changes on international markets, as the national currency appreciates or depreciates vis-à-vis the currency in which commodities are traded. This indicates that exchange rate type within a country could be one actor in the transfer of inflation among countries. Under a fixed nominal exchange rate, each country suffers a welfare loss when there is inflation in the other. Since exchange rate in Ethiopia is managed floating type that is not fully flexible as to the market condition, it could not insulate the economy from foreign disturbances. Thus, there should be taking additional policy measures to insulate economic problems like inflation that could easily transfer from one country to the other.

