What causes food inflation?

Table of Content

• What is Inflation?
• What causes inflation?
• What are the different ways to measure inflation in India?
• What are the impacts of rising Inflation?
• What causes food inflation?
• What Government does to control this?
• Conclusion

What is Inflation?

• Inflation is the rate of increase in prices over a given period of time.
• It indicates how much expensive a set of goods or services has become over a specified period, usually a year.

What causes inflation?

1. Demand-Pull Inflation:

• It occurs when demand for goods and services exceeds the supply.
• The high consumer spending can drive prices up in a booming economy.

2. Cost-Push Inflation:

• It is caused by rising production costs, such as higher wages or raw material prices.

3. Built-In or Wage-Price Inflation:

• It is a feedback loop between wages and prices, where the higher wages makes businesses to raise prices, prompting workers to demand even higher wages to fulfil for the prices.

4. Monetary Inflation:

• It is linked to an increase in the money supply.
• More money in circulation boosts consumer purchasing power, increasing demand and prices.

5. Supply Shocks:

• It is a sudden disruption in supply, like natural disasters or geopolitical events, which reduces availability of good or services, increasing prices.

6. Built-In Expectations:

• If people expect future price to rise, they may act in advance to secure goods or higher wages.
• This behavior can cause businesses to raise prices, contributing to inflation.

What are the different ways to measure inflation in India?

• Consumer Price Index (CPI):
  • It measures changes in the average retail prices paid by consumers for a basket of goods and services over time.
  • It is used by the Monetary Policy Committee (MPC) to control inflation.
• Wholesale Price Index (WPI):
  • It measures the average change in the prices of goods at the wholesale level from the perspective of producers and businesses.
  • It includes primary articles, fuel and power, and manufactured products.
• Producer Price Index for Manufacturing (PPIM):
  • It measures the average change in the selling prices received by domestic producers for their output of manufactured goods.
  • It specifically focuses on the manufacturing sector.
• Consumer Food Price Inflation (CFPI):
  • It is a component of CPI, that tracks the price fluctuations of commonly consumed food items.
  • It includes cereals, vegetables, fruits, dairy products, meat, and other essential food staples.

What are the impacts of rising Inflation?

Decreased Purchasing Power:

• Effect: Inflation reduces the value of money, meaning people can buy fewer goods and services with the same amount of money.
• Impact: Lowers the standard of living and diminishes the real value of savings.

Interest Rates and Investment:

• Effect: Central banks may raise interest rates to combat inflation, increasing borrowing costs.
• Impact: Slows down investment and economic growth, leading to issues like the Twin Balance Sheet Problem.

Uncertainty and Planning Challenges:

• Effect: High or unpredictable inflation creates economic uncertainty.
• Impact: Businesses struggle to plan long-term due to constantly changing prices, leading to investment hesitancy.

Speculative Behavior and Asset Prices:

• Effect: Inflation can lead to speculative investments as people seek returns that outpace inflation.
• Impact: Real estate prices may surge as investors and can contribute to asset price bubbles.

Social and Political Consequences:

• Effect: Persistent high inflation can lead to public dissatisfaction, protests, and demands for wage increases.
• Impact: Governments may implement policies to address inflation, but the effectiveness can vary and may have broader economic implications.

What causes food inflation?

• Climate change: It includes fewer rainy days, longer dry periods, heavy rains at times, shorter winters, and heatwaves. Example: Weather changes have recently led to poor harvests of some crops like pulses, tomatoes, potatoes, and wheat in central India.
• Supply shocks: It can be caused by climate issues, wars, or pandemics, often resulting in very high price increases. In response, farmers might greatly increase their production, which can then decrease the prices and the cycle of inflation and deflation.
• Demand Surge: Population growth or changing consumer preferences increase demand, leading to higher prices if supply can’t keep up.
• Energy Prices: Higher oil prices increase transportation costs from farms to stores, raising consumer prices.
• Currency Exchange Rates: A weaker domestic currency makes imported food more expensive, contributing to inflation.
• Tariffs and Restrictions: Import restrictions can limit available food varieties and drive up prices.
• Government Policies: Subsidies can lower production costs, while price controls can limit price increases.

What Government does to control this?

Buffer stock:

• Action: Government creates a reserve of essential food itemslike rice, wheat, pulses, oilseeds, sugar, etc when there’s a lot of it and sell it during times of crop failure.
• Purpose: Stabilize prices by releasing stocks of essential food items, when necessary.

Reduction in Import Duty:

• Action: Incentivizing pulse cultivation and reducing import duties on certain pulses.
• Purpose: Enhance domestic production and boost local availability.

Export Bans:

• Action: Bans on exports of certain times.
• Purpose: Maintain ample domestic supply and lower prices.

Ban on Stockpiling:

• Action: Limit stocks piling for traders, millers, wholesalers, and retail chains.
• Purpose: Prevent excessive stockpiling.

Operation Greens:

• Action: Stabilize supplies of Tomato, Onion, and Potato (TOP) crops throughout the year.
• Purpose: Minimize price fluctuations.

Floor Prices:

• Action: Imposed a minimum export price (MEP) on exports of certain items.
• Purpose: Ensure sufficient domestic availability amid rising prices.

Conclusion

Inflation is a critical economic indicator that measures the rate at which the prices of goods and services increase over a given period. Various factors contribute to inflation, including demand-pull effects, cost-push factors, wage-price spirals, monetary expansion, supply shocks, and built-in expectations. In India, inflation is measured through several indices, such as the Consumer Price Index (CPI), Wholesale Price Index (WPI), Producer Price Index for Manufacturing (PPIM), and Consumer Food Price Inflation (CFPI). Each index focuses on different aspects of price changes, providing a comprehensive understanding of inflationary trends.

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