What is causing food inflation ?

What is causing food inflation ?

It is protein products, not wheat and rice that are pushing food price index

In the past, it was rising onion prices that made politicians shed tears out of fear of losing elections. Now it is shooting milk prices that has become a major cause for concern.

Prices of protein products like milk, eggs, meat, along with fruits and vegetables, have increased manifold and has affected people of all economic classes. The latest figures released on October 13 by the ministry of commerce and industry says India’s wholesale food prices increased 9.32 per cent in the week ending October 1, which was a little lower than the 9.41 per cent inflation recorded the week before.

Reserve Bank of India deputy governor Subir Gokarn says an inadequate supply response to the rising demand for food articles like milk and fishery products have led to high food inflation export of animal fodder, which is in short supply locally, is the reason for rise in milk prices. Prices of milk have risen by more than 10 per cent since March Agriculture economists say hoarding, faulty import-export policy and increasing purchasing power are some of the other reasons for food inflation

The Reserve Bank of India deputy governor Subir Gokarn says an inadequate supply response to the rising demand for food articles like milk and fishery products have led to high food inflation. “A major reason why food inflation is so problematic is because we are consuming more and more protein and the supply response is rather weak,” said Gokarn, while speaking to media persons recently. He added that export of animal fodder, which is in short supply locally, is the reason for rise in milk prices. Prices of milk have risen by more than 10 per cent since March.

Gokarn was one of the first persons who gave a new dimension in the debate surging on food inflation in India. During his speech on October 26, 2010 he stated that the dynamics of inflation, and in particular food, has changed. Earlier food inflation was mainly because of rise in prices of crops like wheat, rice and surge in prices of particular vegetables like onions. But in the period 2009 to 2011, food inflation had risen not because of these items, but because of proteins.

A comparison of rate of inflation (see tables) shows that inflation rate for egg, meat and fish has increased from 7.26 to 10.35 per cent, while that for pulses has increased from 1.49 per cent in September to 6.87 per cent on October 1. The index for food articles group rose by 0.9 per cent for week ending September 24 due to higher prices of fruits and vegetables (4 per cent), moong, rice and ragi (2 per cent each) and gram tea and condiments and spices (1 per cent each). However, the prices declined for poultry chicken (9 per cent), bajra (4 per cent), maize (3 per cent) and jowar (2 per cent).

Wholesale Price Index (WPI) and Rates of Inflation [Base Year: 2004-05]

Week Ending 1st October, 2011 (Base: 2004-05)
Commodities/Major Groups/Groups/Sub-Groups	WPI Oct 01, 2011	Latest week over week		Build up from end March		Year on year		52 week avg
		2010- 2011	2011- 2012	2010- 2011	2011- 2012	2010- 2011	2011- 2012
Food Articles	199.5	1.00	0.91	11.01	11.39	17.14	9.32	10.74
Cereals	177.4	-0.12	0.68	1.51	3.44	5.06	5.41	4.04
Rice	177.1	0.24	1.90	2.58	6.18	4.69	5.86	3.68
Wheat	167.6	-0.41	0.36	-1.81	-1.76	4.15	-0.24	-0.80
Pulses	211.5	1.49	0.86	-1.15	11.67	4.05	6.87	-6.62
Vegetables	235.4	7.98	6.23	60.60	64.16	25.26	13.01	13.33
Potato	156.0	3.94	-1.33	47.50	45.39	-48.30	3.79	-16.49
Onion	235.4	12.25	-8.80	67.09	39.54	28.18	-10.15	38.96
Fruits	177.6	0.83	1.25	8.95	-4.67	14.71	12.19	21.78
Milk	196.1	0.00	0.00	4.22	12.70	21.38	10.35	11.14
Egg, Meat & Fish	211.7	-1.48	-1.85	10.06	7.24	28.06	9.92	13.14

Source: Ministry of Commerce and Industry press release dated October 13
Trend of Rate of Inflation for some important items during last six weeks

Commodities/major Groups/Groups/Sub-Groups Rate of Inflation (in percent) for the week ending 01, Oct 2011 24, Sep 2011 17, Sep 2011 10, Sep 2011 03, Sep 2011 27, Aug 2011 Food Articles 9.32 9.41 9.13 8.84 9.47 9.55 Cereals 5.41 4.57 3.83 4.13 5.02 5.45 Rice 5.86 4.13 3.48 4.02 4.39 4.65 Wheat -0.24 -1.01 -2.67 -2.72 -2.03 -1.04 Pulses 6.87 7.54 4.86 1.49 -2.45 -1.56 Vegetables 13.01 14.88 11.98 12.13 17.47 22.42 Potato 3.79 9.34 14.91 13.78 21.16 13.38 Onion -10.15 10.58 17.04 28.92 42.98 42.03 Fruits 12.19 11.72 12.47 17.67 22.64 16.57 Milk 10.35 10.35 10.35 10.38 10.02 9.12 Egg, Meat & Fish 9.92 10.33 13.17 9.28 5.97 7.26

Source: Ministry of Commerce and Industry press release dated October 13

Changing inflation dynamics

Agriculture economists from Punjab Agricultural University and Indian Agricultural Research Institute say there are various reasons for the steadily rising prices the past two years. Hoarding, faulty import-export policy and increasing purchasing power are some of the reasons, they say. Indian economy is growing at more than eight per cent and purchasing power of people is also rising which is one of the reasons why people are able to survive the price crisis.

H S Sidhu, head of the economics department, Punjab Agricultural University, says, “Change in food habits are attributed to increase in incomes and changing lifestyle that have diverted food habits from cereals to more protein diet.” He, however, adds that with the arrival of kharif crop in the market now, there would be certain decrease in food inflation.

Deepak Mohanty, Reserve Bank of India’s executive director terms the rise as “structural food inflation”. His research shows that growth rates in monthly per capita expenditure have risen from 0.2 per cent in 2000-05 to 1.2 per cent in 2005-10 in rural areas and from 1.3 per cent in 2000-05 t0 2.0 per cent in 2005-10 in urban areas. As a result, the share of proteins in food consumption has risen from 27 per cent in 2004-05 to 30 percent in 2009-10 in rural and from 28 per cent to 32 per cent in the same period in urban areas. He presented his findings in a speech titled 'Changing Inflation Dynamics in India' on August 13, 2011.

A policy maker with the Planning Commission says failure to push through much-awaited reforms such as opening the multi-brand retail sector to foreign investment is one of the possible reasons for persistent high food inflation. “Once FDI is allowed, it will surely ease the situation,” he adds.

An official with the agriculture ministry says commodity prices are expected to decrease as first advance estimates of production of major agricultural crops is out. “We are expecting around 124 million tonnes of foodgrains and 209 lakh tonnes of oilseeds during the kharif season,” he says. “With a good monsoon and bumper production, we feel that there would be a decline in commodity prices and it would ease inflation by the year-end.” He, however, refused to comment on what were the reasons of inflation fluctuation.