Impact of Climate Change on Food Inflation in India: A Growing Concern

Impact of Climate Change on Food Inflation in India: A Growing Concern

Sub: Eco

Sec: Inflation

• Introduction:
  • Climate change is significantly contributing to endemic food inflation in India, shifting food price dynamics from being temporary to a persistent issue.
• Disruption of Traditional Demand-Supply Mechanisms:
  • Erratic weather patterns and extreme climatic events are causing supply disruptions, leading to rising food prices.
  • The usual demand-supply matrix is no longer the primary factor in determining food prices, as climate change impacts crop production and supply.
• Rising Food Inflation Trends:
  • Average food inflation increased from 2.9% (2016-2020) to 6.3% in the 2020s, primarily due to climate-related supply shocks.
  • The incidence of multiple, overlapping climate events is now the dominant factor driving this increase.
• Monsoon Distribution and Its Impact:
  • Even during periods of normal monsoons, the distribution has been highly skewed, negatively impacting crop growth and contributing to food inflation.
• Endemic Nature of Food Inflation:
  • Over the last 48 months (June 2020-June 2024), food inflation was reported above 6% in 57% of the months, indicating that food inflation is becoming endemic rather than transitory.
• Impact on Nutrition and Public Health:
  • High food prices restrict access to nutritious diets, particularly among economically marginalized populations, leading to worsening nutrition and health outcomes.
  • A 5% increase in food prices has been linked to a 1.6% increase in stunting and a 2.4% increase in severe stunting in children aged 24-59 months.
• Future Implications:
  • By 2035, climate change is projected to increase food inflation by 2% and overall inflation by 1% in India.
  • The cost of living crisis, exacerbated by climate change, could lead to widespread malnutrition and deteriorating public health.

Inflation and Its Types

Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power over time. It indicates how much more expensive a set of goods and services has become over a period, usually a year. Inflation can be classified into several types based on its causes, intensity, and persistence.

Types of Inflation Based on Causes

Demand-Side Inflation: This occurs when the demand for goods and services exceeds the economy’s ability to produce them, leading to higher prices.

Causes:

• Increased consumer spending due to higher incomes or lower interest rates.
• Increased government expenditure.
• Export growth outpacing supply.

Key Concept: Often referred to as Demand-Pull Inflation because the higher demand “pulls” prices up. 

Supply-Side Inflation: This happens when production costs increase, leading to a decrease in the overall supply of goods and services, pushing prices higher.

Causes:

• Rising costs of raw materials, labor, or energy.
• Supply chain disruptions (e.g., natural disasters, geopolitical events).
• Regulatory changes or increased taxes.

Key Concept: Known as Cost-Push Inflation since the higher costs’ “push” prices up.

Types of Inflation Based on Intensity 

a. Creeping Inflation

• A mild and gradual rise in prices, typically at a rate of 1-3% per year.
• Impact: Generally considered manageable and often seen as a sign of a growing economy.

b. Walking Inflation

• Moderate inflation with prices rising at a rate of 3-10% per year.
• Impact: Can be concerning as it may start to erode purchasing power more noticeably.

c. Galloping Inflation

• Rapid inflation with prices increasing by double digits, often between 10-50% per year.
• Impact: Can lead to significant economic disruption, reducing the real value of money rapidly.

d. Hyperinflation

• Extremely high and typically accelerating inflation, with prices rising by more than 50% per month.
• Impact: Causes severe economic instability, often leading to the collapse of the currency and economy.

Types of Inflation Based on Persistence

Core Inflation

• Measures the long-term trend in the price level by excluding volatile items like food and energy prices.
• Purpose: Used to gauge the underlying inflation trend and guide monetary policy.

Headline Inflation

• Includes all items in the consumer basket, including food and energy.
• Purpose: Provides a broader picture of inflation but can be more volatile due to the inclusion of food and energy prices.