Knowing More on Causes of Food Inflation

Food prices increasing in the industrialised world are an annoyance and cause for complaint. However, rising food prices might become the difference between running hungry and not having enough to eat in the impoverished world because of economic disparity. During inflation, people from the middle and upper economic classes will have enough funds to buy food items; it is the lower economic class and people belonging to the bottom of the poverty line who will take the most hit.

The price of food fluctuates a lot. Agricultural prices are volatile because the demands are inelastic, and the supply might fluctuate according to the weather. Nonetheless, despite the typical volatility, food costs appear to rise tremendously – reaching new highs in recent times. This paper will discuss the recent causes of food inflation and its effect on the economy.

What is food inflation?

The issue of food inflation has resurfaced on the global political agenda. In August, food inflation reached 18%, the highest in three years. Every food item now competes with onion in terms of being out of reach. By August last year, the onion prices had risen by 245 per cent, while the price of other vegetables had risen by 77 per cent. Since 2006, food costs have been steadily growing. Over 41% of overall inflationary pressure has been contributed to food inflation during the last five years.

What is CPI food inflation?

CPI, or Consumer Price Index, is considered to be one of the major economic indicators. It tracks retail prices at a specific level for a specific product. It also indicates price movement in rural, urban, and all other areas across the country (both increase and decrease of the commodity prices over a time span). CPI-based inflation, often known as retail inflation, changes the inflation figures over time.

To calculate inflation, we calculate the percentage change in the CPI over the same period of the previous year. Deflation is defined as a drop in prices (negative inflation). The Reserve Bank of India pays special attention to this metric to ensure price economic stability.

The CPI is commonly used as a macroeconomic measure of inflation, as an instrument, by central banks and governments for price-level targeting and price stability inspection and as a deflator in national accounts. The CPI also aids in determining the true worth of earnings, wages, and pensions and the buying power of a country’s currency and rate regulation. The CPI, one of the essential statistics for determining economic health, is based on a weighted average of commodity prices. It essentially provides an estimated cost of living.

What are the causes of food inflation?

A diverse set of circumstances drives various elements of food inflation. Inflation in cereals is mostly influenced by the cost of production and MSP increases. MSP or Minimum Support Price determines the insurance that agricultural producers have to tackle any sharp incline or decline in prices.  While, milk, vegetable, meat, and fish inflation is primarily driven by input cost inflation and a positive demand-supply imbalance. These two variables and MSP increase mainly drive pulses inflation. Edible oil and sugar prices grow due to global food inflation, while MSP hikes are another factor that drives sugar price inflation.

Food inflation in India has been attributed to several factors, including increased income and dietary variety, which increase the market for food items and add to inflationary pressures. 

The expenditure coefficients for goods like cereals, vegetables, legumes, fruits, meat, milk, and fish are computed using household spending expenditure survey data from the National Sample Survey Organisations. All of the estimated spending elasticity is positive, with those for milk, vegetables, and fruits above one, meaning that a 1% rise in household expenditure corresponds to a 1% increase in demand.

What are the factors affecting food inflation in India?

Food has to travel long distances, and rising energy prices increase shipping expenses. After a rise in oil prices, you should expect high food costs six weeks later. Oil prices have an impact on agriculture as well. Fertilisers contain a substantial amount of oil byproducts.

• Prevalent contagions: A significant cause of increasing food costs and food inflation in different areas is the recent Covid-19 pandemic. The situation has impacted the national food supply chain, with producers at the agricultural level, traders, and other institutions losing business. There is a shortage in the labour force in the rural areas where ingredients are grown. Therefore, there are noticeable shortages in delivery, generation, and point-of-sale staff, contributing to food inflation. 

• The increasing cost of food internationally: The cost of food items has increased globally, as seen in the 2008-2010. Reports on the monthly food product data between 2004 and 2013 showed co-movement between international and domestic food costs with significant fluctuations at the commodity level. The co-movement is higher for items that are tradeable, like sugar, edible oils, and meat, but low for dairy products and cereal. 

• Increasing input costs: Agricultural labour cost accounts for over 40% of overall food cultivation costs. It has increased over the years. Agricultural wage rates were parallel to inflation rates till 2007, but increased afterwards. There were many unexpected shifts noticeable in wage inflation between 1999 and 2012 regarding agricultural-based occupations. 

• Diet focused on high-value food products: There is a higher demand for high-value food items in different communities, like eggs, milk, pulses, meat, fish, fruits, and vegetables. This diversification and demand growth has affected food costs, influencing food inflation parameters. Plus, protein-rich foods became more popular than starchy staple food, and households began consuming more chicken, egg, and milk. With growing household income, the expenditure rates rose for fruits, proteins, and vegetables. 

Conclusion

There are a lot of different conditions that affect the condition of food inflation in  India. The demand for specific food groups and disruptions in the global market affected the cost of food products over an expansive timeline. The lack of manpower in the rural areas where food is produced and wage rates also contributed to the growing inflation. In the recent period, the pandemic was a notable determiner of the cost and supply of food items worldwide.