Food price inflation is pervasive effects to household welfare and macroeconomy.The study estimated Quadratic Almost Ideal Demand system of six food groups to simulate money costs of food prices inflation on households’welfare and predict relative potency of income and price policies to counteract 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.While response to income change of households is commodity specific,the rural dwellers respond more than urban counterparts to price changes.The welfare losses due to higher food prices fall heavily more on urban households than rural counterparts.On average,it requires resource allocation as large as percentage increases in prices which could be achieved through a mix of price and income policies to keep households’welfare at pre-price change level.
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