Rising Food Inflation

Rising Food Inflation

 

Context:

Recently, the retail inflation in India hit 3.65% in August, particularly on the account of rising food prices.

 

Relevance:
GS-03 (Economy)

 

Dimensions of the Article

• What is Inflation?
• Issue at Hand
• Factors Behind Food Price Inflation
• Advantages of Inflation

 

 

What is Inflation?

• Inflation refers to the general increase in price levels of goods and services over a period of time.
• In India, Consumer Price Index (CPI) is used to measure inflation, as it tracks the price changes for a basket of goods and services that are typically consumed by households.
• The RBI in-order to maintain price stability and support economic growth, aims to keep inflation around 4%, within the range of 2% to 6%.

 

Issue at Hand

• According to the recent data released by the NSO, the food inflation has continued to rise.
• The major contributor of this include vegetables like potatoes, onions, carrots, and brinjals
• Furthermore, the increasing vegetable prices alongside slow declines in pulses and cereals, have both contributed to overall rise in food inflation which is affecting especially the rural areas.
• Apparently, core inflation has also contributed equally. (Core inflation: which excludes volatile items like food and fuel — showing signs of resurgence).
  • The increase in the Core inflation is a signal that inflationary pressures might not ease soon.
  • The irregular monsoon patterns, is also contributing by affecting agricultural productivity and, consequently, food prices.

 

Factors Behind Food Price Inflation

• Mismatch in Demand and Supply: Extreme weather events and changes in consumer preferences creates an imbalance between food supply and demand which  leads to price hikes.
• Production Costs: Rising farmer’s expenses like fuel, fertilizer, and labor, will lead into higher food prices.
• Energy Prices: Rise in fuel prices makes transportation expenses double and eventually affect the food supply chain. This influences consumer prices periodically.
• Currency Exchange Rates: Variations in exchange rates can impact food prices, particularly for countries reliant on imported food.
• Trade Policies: It affects both imported and domestically produced food prices.
• Government Policies: Subsidies, price controls, and regulations enforced by governments can influence food prices.
• Global Events: Geopolitical conflicts, pandemics, and trade disruptions can disrupt food supply chains, leading to price spikes.
• Climate Change: Climate-related events like droughts and floods can damage crops, reduce yields, and elevate food prices in the long term.

 

 

Advantages of Inflation

• Moderate inflation encourages spending and investment. People generally tend to buy goods and services even before prices go up. This could accelerate economic growth.

• As inflation reduces the real value of debt, the cost of paying back loans is effectively lower. This can ease the financial burden on borrowers.

• Rising prices encourages businesses to invest in new projects, with an expectation of increased profits in the future. This can result in job creation and further economic growth.

 

Disadvantages of Inflation

• Erodes Purchasing Power:  As prices rise, the same amount of money buys fewer goods and services which will affect people with fixed incomes and can lead to a lower standard of living.

• Hurts Savings: If the inflation rate is higher than the interest rate on savings, the real value of savings decreases over time. This discourages people from saving.

• Increases Uncertainty: Inflation creates a fear in both consumers and businesses that prices might rise further, or that they might not be able to afford future costs.

• Impact on Low-Income Households:  As they spend a majority part of their income on basic necessities like food and housing, price rise hits them harder.

• Undermines Economic Stability: When prices rise rapidly, the wage demands from workers increases, which pushes the costs for businesses. And ultimately the businesses will again pass those costs onto consumers in the form of even higher prices, creating a vicious cycle.

 

Way Forward

• As food inflation is majorly contributing to overall inflation in India, its important to improve agricultural productivity.
• Investing in better irrigation systems, timely supply of fertilizers, and on modern farming technologies can bring about an improvement in food inflation.
• Investments in areas related to supply chain like cold storage, transportation, and market linkages should also be the priority.
• Attending to the core inflation mainly requires structural reforms in industries and sectors driving non-food price increases. The government should bring about policies that reduce bottlenecks in manufacturing. It will improve competition, and lower input costs can help keep core inflation in check.