All About Food Inflation

Food inflation in a developing country like India is quite volatile. Agricultural prices fluctuate because demand and supply are inelastic, and supply might vary due to external factors like weather. Nonetheless, despite the typical volatility, food costs appear to rise, reaching record highs in recent years.

India has witnessed a surge in food prices for the fifth consecutive month in February 2022, reaching 5.85%, the highest level since November 2020. This food inflation can be attributed to rising costs of oils and fats (16.44%), meat and fish (7.45%), and vegetables (7.45%) (6.13% ). 

Food inflation in India has been a source of worry in recent years. Several variables contribute to significant food inflation. These include

• high international prices
• a rise in demand for high-value items owing to increased income and dietary diversity
• high minimum support prices
• increase in the price of key inputs.

Impact of Geopolitics on Food inflation in India 

Managing inflation is difficult, especially in an import-dependant country like India. Geopolitical disturbances in any part of the world can impact the food prices in India. For example, almost all global commodities have seen price increases as a result of the Russia-Ukraine crisis. Edible oils, wheat and grains, fertilisers, crude oil, and metals have been particularly heavily impacted.

Ukraine is known as the “breadbasket of Europe”. Apart from being a significant producer of sunflower oil, this region is also a notable producer of corn (sixth largest), barley (sixth largest), rapeseed (seventh), wheat (ninth), poultry, and meat.

Food inflation in India

Retail and wholesale food inflation in India has been growing, with the current Whole Price Index for food at 10.33% and CPI-food at 5.43% as of January 2022. Rising worldwide prices for edible oils, cereals, cotton, fertiliser, milk, sugar, and other commodities would undoubtedly make inflation management more difficult in the future. In theory, every price index may be computed using producer, consumer, or wholesale prices, each having a distinct function. The producer price index tracks the average selling prices set by domestic manufacturers and service providers.

This is in contrast to other inflation metrics, such as the consumer price index (CPI), which measures average costs from the consumer’s point of view. Due to the implementation of taxes, subsidies, and distribution expenses, the seller and consumer prices for any food item may differ significantly. The wholesale price index (WPI) ideally gauges average prices in the wholesale sector, where items are sold in large quantities.

What commodities are fueling food inflation?

Short-term supply limitations, such as unfavourable weather, affect the price of food to a large extent. Additionally, there is evidence of rising long-term supply limits, such as the loss of farmed areas due to global warming. China’s and India’s rapid economic expansion raises the demand for more resource-intensive food products. People tend to spend a more significant proportion of their income on meat and dairy products as their salaries grow. This necessitates more intense land cultivation. Crops, for example, are used to feed animals. As a result, the supply of food crops has diminished.

What factors account for the rise in food prices?

Animal-sourced food, fruits and vegetables, processed food, and grains were recognised as the top four drivers of food inflation. Long-term issues include structural aspects as well as government initiatives. Demand-side variables such as the shift in demand structure away from grains and toward high-value commodities such as animal products also cause food inflation. This is due to increased earnings and changing living habits, such as urbanisation.

Changes in output and productivity are examples of supply-side influences. On the supply side, India’s agriculture industry has been underperforming. In the 20 years since 1990, the industry has achieved an average annual growth rate of about 3%, with substantial volatility. India, for instance, presently has poorer cereal yields per acre than other similar nations like Bangladesh, China, Pakistan, and Sri Lanka. 

Conclusion

Food price increases in the industrialised world are an inconvenience, something to lament. However, rising food prices in the developing world might be the difference between going hungry and having enough to eat. It is crucial to remember that food price increases are typically transient and result from local bottleneck shortages. While rising food costs create headlines, subsequent price drops make less news. Even brief periods of increased prices can generate significant misery for individuals living on the breadline. If environmental concerns continue to rise, the demands on both supply and demand may cause food prices to rise more often. These long-term structural issues add to the system’s inherent inflationary pressures, rendering it sensitive to price rises caused by short-term shocks.