U Nderstanding the Nature and Causes of Food Inflation

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drought, output and inflation

understanding the nature and Causes of food inflation
Ramesh Chand

The main reason for the current surge in food prices is the supply shock due to the drought in 2009 and the carry-over effect of the low growth of food production in 2008-09. As the frequency of such shocks is expected to rise, India needs to have an effective food management strategy to deal with these episodes. It also needs to explore various other options for price stabilisation like maintaining buffer stocks and using trade. The economy has to invest heavily in expanding storage capacity for various types of foods in both the public as well as private sectors. Due to fluctuations in growth, the export of some commodities in one or two years is followed by their imports, which invariably involves a large variation in costs and prices. As India is a net exporter of food, a part of what is now exported needs to instead become part of domestic stabilisation stocks.


olicymakers and administrators seem unable to bring food prices under control. Food inflation, based on the wholesale price index (WPI) for food articles and food products, entered double digits in April 2009 and crossed the 20% level in December. The increase in prices is not restricted to a few commodities, and it is being experienced across the board; the exception being edible oils. Inflation at the retail level, which ultimately is what matters for consumers, is more serious than wholesale prices. At this rate of inflation, Indian consumers are required to spend about 20% more on food compared to the previous year to maintain their consumption level. A large percentage of households in the country is not in a position to raise its food expenditure to neutralise the effect of inflation. This is surely going to aggravate food and nutrition deficiency which remains at a very high level (Deaton and Dreze 2009). The debate on the causes of inflation is full of confusion and most experts do not distinguish between long-run and short-run inflation. While the imbalance between demand and supply is often mentioned as an important factor, an adequate understanding of this imbalance is missing. The long-run implications of the emerging trends in food production have also received little attention. This article looks at the long- and short-term changes in food prices in nominal and relative terms and examines how these changes are affected by changes in production and other factors. It also examines the effect of trade in food products on domestic prices and supply.

items, which includes food articles as well as food products, was 5.64%, and it was lower than the inflation in prices of nonfood commodities.1 The average rate of inflation among various food items varied between 4% and 7.5% (Table 1, p 11). The lowest inflation during this period was experienced in sugar and the highest in fruits and vegetables. After 2005, food prices increased at a much faster rate than non-food prices, except in 2008 when the prices of commodities spiked in India and in the global market. Food and non-food prices showed a disparate movement after January 2009 (Figure 1, p 11). On an annual basis, food prices in 2009 increased by more than 12% over 2008, in contrast to the 1.76% decline in non-food prices. It is important to point out that food inflation in wholesale prices since 2005 has been accelerating, and it was close to 20% in January 2010. Annual average food inflation during the period 2006 to 2009 was more than 80% higher than inflation in non-food commodities. These trends show that the real prices of food (food prices relative to non-food prices) declined during the period 1993-94 to 2004-05 and increased after 2005. Within the food group, the highest inflation is observed in the case of pulses and the lowest in the case of edible oils. Except edible oil, the real prices of all major food items have registered an increase during the past four years. Food prices...
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