FOOD INFLATION

S.KAMAL HAYDER KAZMI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
Dec 26, 2011 - Jan 1, 2012

Since rising prices eat away at the buying power of consumers, they are the leading cause of concern of governments around the world.

Food is the most frequently purchased item and constitutes major share in monthly household expenditure in many poorer countries including Pakistan and therefore rising prices lead to social tensions.

Hike in global food prices affects especially those countries where food is a main component in the import list. Rising food import bills can lead to a reduction in the volume of imports and a consequent reduction in consumption.

However, food price inflation is not a problem in food importing countries alone. It is also a problem for food exporting countries.

For net food exporters, higher food prices represent an opportunity that could result in more employment in rural areas and therefore lower poverty rates. While agribusiness and farmers in food exporting countries benefit from higher prices, local consumers, and particularly urban poor, may face price inflation as local prices are indexed to international prices.

Net agricultural exporters import some food products in significant quantities due to their specialization in a subset of agribusiness products. Some of them export low quality grains and import high quality grains. Overall balance of trade in commodities is dependent on such kind of transactions in typical net exporting countries.

The export of lower quality grain is partly because of the inadequate control over post-harvest losses and lack of modern warehousing and storage space. Fears of the economic and social impact of continued food price increases are now commonly shared across the world in both food importing and exporting, rich and poor, transition and non-transition countries.

Importance of spending on foods in overall consumer expenditure pales into insignificance in economies with good per capita income.

Transition countries in general tend to spend a lot more of their incomes on food than more developed market economies. For example, the bottom income groups of the populations in central Asia spend up to two thirds of their total expenditures on basic foods alone.

Food price inflation is also a matter of concern in macroeconomic perspective. Inflation rates are surging across Pakistan, and feed into broader price expectations and wage setting.

This is likely to persist even if food price inflation subsides. This has the potential to disrupt the macroeconomic and financial stability that has characterized the region since five years.

More recently, the consumer price index (CPI) inflation increased by 10.2 per cent year-on-year (YoY) in Nov 2011 as compared to 11 per cent in the previous month and 15 per cent in Nov 2010.

On month-on-month (MoM) basis, it increased by 0.3 per cent in Nov 2011 as compared to 1.4 per cent in the previous month and one per cent in Nov 2010. The core inflation measured by non-food non-energy CPI (Core NFNE) increased by 10.4 per cent in Nov 2011 as well as in October 2011 (YoY) and by 9.4 per cent in Nov 2010.

Core NFNE inflation on month on month (MoM) basis increased by 0.6 per cent in Nov 2011 as compared to 1.4 per cent a month earlier and 0.6 per cent in Nov 2010.

Sensitive price index (SPI) inflation on YoY basis increased by 3.8 per cent in Nov 2011 compared with 6.5 per cent a month earlier and 22.5 per cent in Nov 2010.

On MoM basis, it increased by 0.7 per cent in Nov 2011 as compared to 0.8 per cent a month earlier and an increase of 3.4 per cent in Nov 2010.

Wholesale price index (WPI) inflation on YoY basis increased to 12 per cent in Nov 2011 compared with 15.4 per cent a month earlier and 20.3 per cent in Nov 2010.

WPI inflation on MoM basis dropped by 0.5 per cent in Nov 2011 as compared to an increase of 0.4 per cent a month earlier and an increase of 2.5 per cent in Nov 2010.

Few commodities that saw price increase over October included in per cent: onions (39.38), eggs (9.88), condiments (5.05), sweetmeat (3.38), betel leaves and nuts (3.05), fish (2.33), milk fresh (2.21), meat (2.05), cereals (1.80) and wheat (1.80).

Commodities which witnessed decrease consisted of in per cent: fresh vegetables (11.77), gur (7.84), chicken (6.89), sugar (6.61), pulse moong (6.52), potatoes (6.46), fresh fruits (3.61), pulse masoor (2.66), pulse mash washed (2.36) and vegetable ghee (0.93).

Pakistan's import bill of eatables reached $2.131 billion in July-Nov 2011 against $2.154 billion over the same months last year, reflecting a slight decrease of 1.10 per cent. The decline in food import was because of no import of wheat and sugar.

The food group played second fiddle to oil import bill in the period under review. The higher import bill of palm oil was because of higher domestic demand and cut in import duty.