ACCELERATION FORETOLD: ON VOLATILE FOOD PRICES

THE CONTEXT: There is resurgence in headline retail inflation in November which was totally unexpected after the RBI just predicted a  small increase. It is a stark reminder of the risks volatile food prices pose.

INFLATION TREND ANALYSIS

• National Statistical Office’s provisional reading of headline inflation shows the Consumer Price Index rose by 5.55% year-on-year to a three-month high, from October’s 4.87%.
• Food price gains measured by the Consumer Food Price Index accelerated by a steep 209 basis points to 8.7% last month. Cereals and vegetables surged 10.3% and 17.7% inflation, respectively.
• Vegetable price’s rate surging by almost 15 percentage points from October’s 2.8%. Only potato prices, which continued to remain in deflationary territory, offered some respite.
• Pulses and sugar are other areas of concern, with the first witnessing more than 20% inflation and the sweetener also experiencing an uptick in the pace of price gains to 6.55%.
• With the RBI having opted to refrain from raising rates for now, the onus lies on the government to help temper inflation.

ABOUT INFLATION:

• Inflation is defined by the International Monetary Fund as the rate of increase in prices over a given period, encompassing a broad measure of overall price increase or for specific goods and services.
• It reflects the rising cost of living and indicates how much more expensive a set of goods or services has become over a specified period, usually a year.

Headline Inflation

• Headline inflation is the raw inflation figure reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics.
• Headline inflation is not adjusted to remove highly volatile figures, including those that can shift regardless of economic conditions.

Core Inflation

• Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors.
• It is most often calculated using the consumer price index (CPI), which is a measure of prices for goods and services.

CAUSES OF INFLATION:

• Supply Shocks: Inflation is caused due to sudden and unexpected disruption to the supply of goods and services. Some of the reasons for reduction in supply are Natural disasters, geopolitical events, or other unforeseen circumstances.
• Demand-Pull Inflation: It occurs when the demand for goods and services exceeds their supply. When the overall demand in the economy is high, consumers are willing to pay more for the available goods and services that leads to a general rise in prices.
• Cost-Push Inflation: It is driven by an increase in the production costs for goods and services. This can be caused by factors such as increased incomes, increased costs of raw materials, or disruptions in the supply chain.
• Increase in the money supply in an economy: When there is more money in circulation, consumers have more purchasing power, which can drive up demand and prices.

CONCERNS RELATED TO INFLATION:

• Decreased Purchasing Power: Inflation erodes the purchasing power of money, meaning that with the same amount of money, individuals can buy fewer goods and services.
• Uncertainty and Planning Challenges: High inflation can create uncertainty in the economy. It becomes challenging to plan for the future when prices are constantly changing. Long- planning term becomes difficult, and uncertainty can lead to hesitancy in making investment decisions. This forces the government to spur the investments and leads to crowding-out effects.
• Reduces overall demand: The eventual fallout of reduced purchasing power is that consumers demand fewer goods and services.
• Worsens the exchange rate: High inflation means the rupee is losing its power. Investors will take away their capital because of reduced returns. Thus, high inflation can lead to worsening of exchange rate.

THE WAY FORWARD:

• Monetary Policy: The Reserve Bank of India (RBI), India’s central bank, plays a crucial role in controlling inflation through monetary policy. The RBI adjusts key interest rates, such as the repo rate, to influence money supply and credit in the economy. These monetary measures can help in tackling inflation.
• Fiscal Policy Measures: The government uses fiscal policies like taxation and public spending to manage inflation. Appropriate fiscal measures can help in curbing demand and controlling inflationary pressures. Higher taxes can reduce disposable income, curbing spending and inflation.
• Food Price Management: Given that food prices often contribute significantly to inflation in India, the government needs to implement initiatives to manage food supplies and prices. For examples, there is need to strengthening Minimum Support Price (MSP) and the Public Distribution System (PDS). To prevent artificial scarcity and price manipulation, the government need to conduct regular checks  against hoarding and black marketing.

THE CONCLUSION:

There is a need to address the high commodity prices and shortages of raw materials to support the consumption in the country by preserving macro-financial stability.

PREVIOUS YEAR QUESTIONS

Q.1 Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.(2019)

Q.2 It is argued that the strategy of inclusive growth is intended to meet the objectives of inclusiveness and sustainability together. Comment on this statement.(2019)

MAINS PRACTICE QUESTION

Q.1 How does inflation affect the consumption and economic growth in the country?. Suggest measures to tackle high inflation in India.

SOURCE: https://www.thehindu.com/opinion/editorial/acceleration-foretold-on-volatile-food-prices/article67642176.ece