Divergence between Global and Domestic Inflation

Divergence between Global and Domestic Inflation

Subject : Economy

Context : The UN Food and Agriculture Organization’s (FAO) world food price index (FPI) touched 127.1 points in May, its highest value since September 2011. But unlike fuel, the increase in global food prices is not getting reflected in what consumers in India are paying.

Concept :

Why the divergence ?

• One needs to first understand the drivers of both global and domestic inflation.
• The spike in international food prices from September-October has been due to demand returning with economies unlocking, even as restoration of supply chains is taking time.
• This has been further aided by Chinese stockpiling (for building strategic reserves, as well as in anticipation of fresh corona outbreaks) and dry weather-induced production shortfalls in Brazil, Argentina, Ukraine, Thailand and even the US.
• India, by contrast, has had good monsoons in 2019 and 2020, making it the only agricultural powerhouse, apart from Australia and Canada, not to have faced serious weather-related issues.
• Not surprisingly, food inflation started falling from December with a bumper post-monsoon kharif crop being harvested and arriving in the markets.

World Food Price Index

• The FAO Food Price Index is a measure of the monthly change in international prices of a basket of food commodities.
• It consists of the average of five commodity group price indices [cereal, vegetable, dairy, meat and sugar], weighted with the average export shares.
• The index has become a critical and timely monthly indicator of the state of international food markets, gauging the change in food commodity prices over time in nominal and real terms.