FOOD INFLATION

S.KAMAL HAYDER KAZMI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
Dec 27, 2010 - Jan 2, 2011

Inflation is a macroeconomic variable that exerts a significant influence over the economic scenario of a country. Broadly, food prices have a larger impact on domestic inflation than do energy prices, as food accounts for a larger share of household consumption. This especially is true for developing countries where a large share of the poor's consumption basket consists of food products.

For decades, food prices were declining in real terms, allowing millions of people around the globe to escape from the trap of poverty. This long-term trend took place despite rapid income and population growth, as agricultural productivity rose steadily. However, productivity gains began to stagnate in the face of continuing growth in demand, bringing about a reversal of this long-term trend. Rising food prices contributed to an acceleration of inflation across the Asia and Pacific region during 2007, and in 2008, the further rise in food prices has reached alarming proportions. The rise in food prices is worrisome precisely because food price inflation is the most regressive of all taxes-it hurts the poor the most.

PAKISTAN: CPI, SPI & WPI INDICES (%)

INDEX 2010-11 2009-10 2008-09
CPI 14.44 10.26 24.65
SPI 18.77 9.03 32.05
WPI 21.63 3.44 30.12
Av. July - Nov over SPLY Change

In fact, the rising inflation pressure has been more intense in net exporting countries. Prices of close substitutes for rice are rising sharply as well; wheat, maize, and soybeans are all at record highs. Three sets of factors must be taken into account in order to explain what is happening to food prices in developing Asia. First is the distinction between structural and cyclical factors; second is the distinction between supply and demand; and third is the relationship between international and domestic markets.

In 2008, food price inflation had hit double digits in Bangladesh, China, Indonesia, Pakistan, and Vietnam. Food price inflation is also rising in India, Malaysia, Philippines, Singapore, and Thailand. The problem is not confined to importing countries, as net exporters are also experiencing food price inflation.

In Pakistan, inflation was driven by the rapid rise in food prices. Those persons who receive less than 2,350 calories of diet per day are bracketed among those suffering from the food crisis. Furthermore, the number of those suffering from the food crisis in Pakistan has increased from 60 million to 77 million, nearly half the total population of the country. However, 38 per cent of Pakistanis are food insecure i.e. they are not able to afford the poverty line intake of 2,350 kcal per day.

Inflationary pressure has intensified of recent on account of a number of adverse developments in the country.

For the first ten months of 2009?10, food has accounted for over 40 per cent of CPI inflation, with inflation in nonperishable items contributing the most to the increase. The sharply higher contribution of nonperishable items to inflation could indicate, among other things, the impact of transportation costs on the structure of food prices.

However, core inflation, defined as inflation in the non-food, non-energy (NFNE) component of the CPI basket, has reversed its path of moderate decline, and stood at 10.6 per cent in April. The refueling of inflationary pressure is evident in all major price indices, with the WPI inflation rising steeply, from 0.3 per cent in August 2009 to 22 per cent in April 2010.

Food inflation has remained elevated in the past few months, stabilizing at around 14.5 per cent, while the rate of change in prices of Non-Food items has been recorded at 12.2 per cent for April. Similarly, the SPI has recorded a 16.7 per cent year-on-year increase for April, versus 6.7 per cent in October 2009.

More recently, country's main commodities, which showed an increase in their prices during November, 2010 over October, 2010 was: Onions (67.39 per cent), potatoes (21.31 per cent), vegetable ghee (7.02 per cent), fish (5.50 per cent), cooking oil (5.15 per cent), sweetmeat & nimco (4.95 per cent), sugar (4.60 per cent), dry fruit (3.82 per cent), readymade food (3.50 per cent), mustard oil (3.08 per cent), milk fresh (3.05 per cent), milk products (2.84 per cent), meat (2.46 per cent), wheat (2.29 per cent), honey (2.27 per cent), gram whole (1.73 per cent), rice (1.52 per cent), betel leaves & nuts (1.44 per cent), milk powder & besan (1.32 per cent each), bakery (1.24 per cent) and wheat flour (1.14 per cent) while, the commodities, which showed a decrease in their prices during same period, were: Tomatoes (16.06 per cent), chicken farm (14.80 per cent), vegetables (9.74 per cent), fresh fruits (7.33 per cent), eggs (6.66 per cent), pulse moong (3.23 per cent) and pulse mash (1.98 per cent).

The increase in domestic prices of commodities remained relatively more muted as compared to the international price movements. However, since January 2010, international prices for some of the commodities shown, barring petroleum, have fallen more rapidly than in the case of Pakistan.

CONCLUSION

Tackling the food crisis and its resultant inflation has to be the top most priority of the government of Pakistan and they have to take several measures to address the problem. The policy measures are needed for establishment of future markets, countering threats, agriculture infrastructure, and investment in value-addition sectors. In addition to rising food prices, rising oil prices have played a part in the increase of inflation globally.