Why the Worst of Food Inflation May Be Over

  • August 16, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
No Comments

 

 

Why the Worst of Food Inflation May Be Over

Sub: Eco

Sec: Inflation

  • Recent Trends in Food Inflation:
    • Retail food inflation remained above 8% from November 2023 to June 2024.
    • The year-on-year increase in the Consumer Food Price Index (CFPI) fell to 5.4% in July 2024, down from 9.4% in June 2024.
    • The sharp decline is partly due to a high base effect from July 2023 when inflation was at 11.5%.
    • Despite the decline, the monthly CFPI rise from June to July 2024 (2.8%) translates to an annualized inflation of 33.8%.
  • Impact of Monsoon on Crop Sowing:
    • The southwest monsoon set in over Kerala on May 30, slightly ahead of schedule.
    • June 2024 recorded 10.9% below normal rainfall, but July saw a revival with 9% above normal rainfall.
  • August 2024 has so far recorded 15.4% above normal rainfall, bringing the cumulative surplus for the season to 4.8% as of August 15.
    • The good monsoon has led to higher acreage under most kharif crops this year compared to 2023 and the normal coverage for this time.
  • Farmers’ Response to Prices:
    • Farmers have sown more of crops like arhar (pigeon pea) and maize due to high market prices above the Minimum Support Prices (MSP).
  • Cotton sowing is down due to flat prices, long cropping duration, and risks of insect pests like the pink bollworm.
    • Farmers have shifted to crops like groundnut, soyabean, and maize, which have shorter maturity periods and potentially better returns.
  • Global Food Price Trends:
    • Global food inflation has been in negative territory since December 2022.
    • The FAO Food Price Index averaged 120.8 points in July 2024, 3.1% down from July 2023.
    • The Cereal Price Index has seen a sharper fall from 173.5 points in May 2022 to 110.8 points in July 2024.
    • Low international prices make imports more feasible, reducing the risk of imported inflation.
  • Domestic Stocks and Future Outlook:
    • Wheat stocks in government warehouses were the third lowest on August 1, 2024, at 268.12 lakh tonnes.
    • Rice stocks were the highest ever for the same date at 454.83 lakh tonnes.
    • A monsoon-aided bumper kharif crop may allow the relaxation of export bans and stockholding limits on various commodities.
    • Reservoir levels are at 65% of total storage capacity, higher than both last year and the 10-year average.
    • There is a high probability of La Niña emerging during September-November, which could bring robust rainfall, benefiting the rabi cropping season.
  • Uncertainty Remains:
    • Despite the optimistic outlook, the harvesting of kharif crops is still at least a month away, and rabi crops won’t be harvested until March-end 2025.
    • Food inflation uncertainty is likely to continue until these harvests are completed.

Consumer Food Price Index (CFPI)

The Consumer Food Price Index (CFPI) is a crucial economic indicator that measures the change in retail prices of food items consumed by the population.

It focuses exclusively on the price changes of food items in a consumer’s basket of goods and services, making it a specific measure of inflation related to food.

  • Definition:
    • CFPI is a measure of change in retail prices specifically for food items consumed by the population.
    • It is a sub-component of the broader Consumer Price Index (CPI) and is used to monitor inflation focused on food prices.
  • Purpose and Use:
    • The CFPI is utilized by the Reserve Bank of India (RBI) to track inflation, especially in the food sector.
    • It helps policymakers understand price changes in the food sector and make informed decisions regarding monetary policy.
  • Categories and Data Release:
    • The Central Statistics Office (CSO), under the Ministry of Statistics and Programme Implementation (MOSPI), began releasing CFPI data separately for rural, urban, and combined categories on an all-India basis from May 2014.
  • Methodology:
    • The CFPI is calculated monthly, using a similar methodology to the Consumer Price Index (CPI).
    • The base year used for CFPI calculations is 2012. The base year was revised from 2010 to 2012 by the CSO in January 2015.

Base Effect

Base Effect is a concept in economics and statistics that describes the impact that the comparison of current data with data from a previous period (the base period) has on the percentage change in a measure, such as inflation, GDP growth, or other indices and it refers to the distortion in percentage change in a variable due to the base year or period against which the comparison is made.

When the base period’s value is unusually high or low, it can make the percentage change in the current period appear smaller or larger than it actually is.

Example in Inflation: Suppose inflation was very low in the base year. When inflation is calculated for the current year against this low base, the current inflation rate might appear higher than usual, even if there is only a small absolute increase in prices.

economy Why the Worst of Food Inflation May Be Over