Inflation refers to the general increase in prices and fall in the purchasing value of money. A specific type of inflation is food inflation, which pertains to the increase in price of food items over time. Calculation of inflation involves various indices such as the Food Price Index (FPI), Consumer Price Index (CPI), and Minimum Support Price (MSP).
The United Nations Food and Agriculture Organization’s (FAO) Food Price Index (FFPI) is a notable indicator that tracks the changes in international prices of a basket of food commodities. In July 2022, this index averaged 140.9 points, seeing an 8.6% decrease from the previous month and marking the most significant monthly drop since October 2008. This staggering decline has prompted experts to predict that food inflation may ease faster than anticipated.
The Fundamentals of Food Price Index (FFPI)
Introduced in 1996 to monitor developments in global agricultural commodity markets, the FFPI measures the monthly change in international food commodity prices. The index consists of five commodity group price indices weighted by the average export shares of each group over a base period (2014-2016). The FFPI reached its highest-ever point in March 2022 at 159.7 points following Russia’s invasion of Ukraine. However, by July 2022, the index had dropped by 11.8%.
What Triggered the Sharp Fall in FFPI?
Various international and domestic factors contributed to the significant decrease in FFPI. Internationally, the unblocking of the Black Sea trade route is expected to enhance the movement of Russian food and fertilisers while Indonesia’s lifted ban on palm oil exports promises increased supply. On the other hand, domestically, India witnessed above-average monsoon rainfall between June and August 2022, bolstering crop harvests.
Identifying Causes of Recent Food Inflation
Several global occurrences contributed to the recent rise in food inflation. Droughts in Ukraine and South America adversely affected sunflower and soybean supplies, while the COVID-19 pandemic disrupted Malaysia’s oil palm plantations. Moreover, the Russo-Ukrainian War resulted in supply interruptions from two major global exporters of staple food commodities like wheat, barley, and sunflower oil.
The Link Between Global and Domestic Food Prices
The impact of global inflation on domestic food prices depends on the extent of a country’s food consumption/production that is imported/exported. For instance, India imports up to two-thirds of its edible oil consumption and exports one-fifth of its production. If there is a shortage in global supply or hike in international prices, it directly impacts domestic prices.
Policy Recommendations and Way Forward
For sustainable growth and development, consistency in import policy is crucial. It helps in sending appropriate market signals well in advance. It is also important to revise and update the decade-old CPI base year of 2011-12 to reflect current food habits and lifestyle changes. With an increasing middle class, spending on non-food items has surged, and this shift must be mirrored in the CPI for the Reserve Bank of India (RBI) to better target non-volatile segments.
Useful Information for UPSC Civil Services Examination
This information is beneficial for those preparing for competitive exams like the Union Public Service Commission (UPSC) Civil Services Examination. The weightage of food in the Consumer Price Index (CPI) is higher than in the Wholesale Price Index (WPI), and the RBI has adopted CPI as its key measure of inflation, contrary to WPI. Additionally, the Agricultural Produce Market Committees (APMCs) set up under the State Acts have been the cause of food inflation in India.