Reasons behind current food inflation

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Last Updated24/05/2022

World and India are witnessing a resurgence of food inflation.

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Between September 2021 and April 2022, consumer food price inflation in India rose from 0.68% to 8.38% year on year.
UN FAO’s food price index hit all-time-highs, and reignited memories of last great commodity inflation.
It was during mid-2000s till around 2012-13, briefly interrupted by 2008-09 global financial crisis.

Former was structural, demand-led inflation, driven by rising incomes.
Real incomes going up resulted in declining per capita consumption of cereals and sugar.
Growing demand for foods incorporating proteins and micronutrients.
This dietary diversification also had a bearing on inflation.
Between 2004-05 and 2012-13, cumulative rise in WPI was 93.1% for sugar, 99.9% for cereals and only 48.1% for edible oils.

The current food inflation is idiosyncratic and supply shock-driven.
It is more “calorie” than “protein” price inflation - term coined by former RBI deputy governor Subir Gokarn.
Since August 2020, when global demand started returning, FAO’s vegetable oil, cereal and sugar price indices have soared 141%, 71% and 50%, respectively.

Ongoing war: worsened things by squeezing supplies from two countries having good share of world’s wheat, corn, barley and sunflower oil exports.
Indonesia imposing restrictions on palm oil shipments to contain local inflation and surging petroleum crude prices, making it more attractive to divert sugar, corn, palm and soyabean oil for bio-fuel production.

No such major inflation in proteins.
FAO’s dairy and meat prices indices have gone up.
That is due to increased cost of feed ingredients as opposed to demand-pull from rising incomes.
Since mid-March, prices of skim milk powder (SMP) and anhydrous milk fat at the Global Dairy Trade fortnightly auction platform have eased by over 9.4% and 15%, respectively.
It is indicative of demand destruction.

Transmission of higher global calorie inflation to prices in India has been limited largely to vegetable fats.
More than 60% of country’s edible oil consumption requirement is met by imports.
Retail edible oil inflation was at 20-35% levels all through 2021, before the surge in the overall consumer food price index from January.
Inflation in other two calorie food commodities – cereals and sugar – has been relatively muted.
Reason for no imported inflation in cereals and sugar is because India is surplus producer of both.
There has been a pick-up in cereal inflation recently.
But that basically in wheat, has come due to crop yield loss caused by sudden heat wave from mid-March.
Transmission mechanism here has worked the other way round:
With lower domestic production and depleting stocks prompting Centre to ban wheat exports from India.
International prices have firmed up – translating into higher inflation for other (importing) countries.

Present food inflation has been more about carbohydrates and fats than proteins and micronutrients.
All-India modal or most-quoted retail prices of dals are lower now than a year ago.
Milk: crash in international SMP and butter fat prices has forced some correction in domestic market as well.
These will ease with arrival of the monsoon rains.
Summer months are lean season for buffalo milk.
Production picks up from August, when animals begin calving, and peaks during winter through spring months.
There has been recovery of demand from reopening of hotels and other lockdown restrictions, it is unlikely to trigger any protein inflation.

Food inflation resulting from war, drought, unseasonal rains and heat waves is different from structural demand-pull factors.
The inflation now is in foods mainly delivering calories rather than proteins, vitamins and minerals.
This makes it worse than previous inflation, which was “an inevitable consequence of rising affluence”.
While high prices would also induce supply response from farmers, a lot is dependent on monsoon.

Prelims take away