Rising Tomato Prices Trigger Fresh Concerns Over Food Inflation Amid Festive Season

Rising Tomato Prices Trigger Fresh Concerns Over Food Inflation Amid Festive Season

Sub: Eco

Sec: Inflation

Why in News

Food inflation in India has spiked, primarily due to a sharp rise in the price of vegetables, especially tomatoes. This surge is driven by reduced supply in markets and increased demand during the festive season, causing concern among households. The Centre has intervened by selling tomatoes at reduced prices to stabilize the situation.

Factors Behind the Price Surge

Excessive rainfall in September has severely impacted tomato supplies, with mandi arrivals dropping by more than half compared to August.

The ongoing festive season has led to an increase in demand, exacerbating the price pressure. Tomatoes have crossed the ₹100 per kilogram mark in many cities, further straining household budgets.

In contrast, prices for other key vegetables such as onions and potatoes remain elevated, adding to the burden of food inflation

What is Inflation?

Inflation refers to the general increase in the prices of goods and services over time, leading to a decrease in the purchasing power of money.

Inflation is typically measured using indices like the Consumer Price Index (CPI) or Wholesale Price Index (WPI).

Can result from demand-pull factors (increased demand), cost-push factors (higher production costs), or monetary factors (excess money supply).

What is Food Inflation?

Food inflation specifically refers to the rise in the prices of food items, leading to increased costs for consumers.

Caused by factors like supply disruptions, seasonal fluctuations, weather conditions (e.g., drought, floods), and market demand.

Part of the overall Consumer Price Index (CPI) but focuses solely on the prices of food products.

About Consumer Food Price Index (CFPI)

The Consumer Food Price Index (CFPI) measures changes in the retail prices of food items consumed by households. It tracks the inflation rate specific to food products, such as cereals, pulses, fruits, vegetables, meat, and dairy.

The CFPI is a subset of the Consumer Price Index (CPI), focusing solely on the food component. Helps monitor food inflation and its impact on household expenditure and purchasing power.

Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials. Higher costs of production can decrease the aggregate supply (the amount of total production) in the economy. Since the demand for goods hasn’t changed, the price increases from production are passed onto consumers creating cost-push inflation.

Demand-pull inflation is the upward pressure on prices that follows a shortage in supply, a condition that economists describe as “too many dollars chasing too few goods. ““When demand surpasses supply, higher prices are the result.”

The main causes of inflation:

Monetary Policy: It determines the supply of currency in the market. Excess supply of money leads to inflation. Hence decreasing the value of the currency.

Fiscal Policy: It monitors the borrowing and spending of the economy. Higher borrowings (debt), result in increased taxes and additional currency printing to repay the debt.

Demand-pull Inflation: Increases in prices due to the gap between the demand (higher) and supply (lower).

Cost-push Inflation: Higher prices of goods and services due to increased cost of production.

Exchange Rates: Exposure to foreign markets is based on the dollar value. Fluctuations in the exchange rate have an impact on the rate of inflation.

The effects of a rise in the inflation rate:

A rise in an inflation rate can cause more than a fall in purchase power.

Inflation could lead to economic growth as it can be a sign of rising demand.

Inflation could further lead to an increase in costs due to workers demand to increase wages to meet inflation. This might increase unemployment as companies will have to lay off workers to keep up with the costs.

Domestic products might become less competitive if inflation within the country is higher. It can weaken the currency of the country.

Prevent inflation:

To prevent inflation, the primary strategy is to change the monetary policy by adjusting the interest rates. Higher interest rates decrease the demand in the economy. This results in lower economic growth and therefore, lower inflation. Other ways to prevent inflation are:

Controlling the money supply can also help in preventing inflation.

Higher Income Tax rate can reduce the spending, and hence resulting in lesser demand and inflationary pressures.

Introducing policies to increase the efficiency and competitiveness of the economy helps in reducing the long-term costs.