Reasons behind current food inflation

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Reasons behind current food inflation

World and India are witnessing a resurgence of food inflation.

Recent data

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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.

Difference between the two food inflationary episodes

  • 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.

Now and then

  • 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.

Other causes

  • 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.

Inflation in protein

  • 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.

Impact on India

  • 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.

What about proteins?

  • 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.

Summing up

  • 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.

Exam track

Prelims take away

  • Inflation
  • Consumer Price Index
  • Wholesale Price Index
  • Food inflation
  • Imported inflation