“FOOD INFLATION ”

Presented By :
Bill Gates group
Definition:
INFLATION

Inflation can be defined as a rise in the general

price level of goods and services and therefore a
fall in the value of money. That means the
purchasing power of your ‘money’ decreases.
 How Inflation is Calculated?
There are two methods to calculate inflation -
1. Wholesale Price Index (WPI)
2. Consumer Price Index (CPI)
1. Wholesale Price Index (WPI):
WPI is the index that is used to measure the change in
the average price level of goods traded in wholesale
market.
In India, a total of 676 commodities data on price level
is tracked through WPI which is an indicator of
movement in prices of commodities in all trade and
transactions.
 Cont…
The 676 commodities are
ITEMS Weightage
divided into different
groups & sub groups. Each
Primary Articles 20.1%
commodity has some
weightage in the WPI
Fuel & Power 14.9%
index. Below are the
weightagesof commodities
Manufactured 65%
group wise: Products
Recent
ITEMS Changes in
Base YearWPI
(OLD 1993-94)
Base Year
(NEW 2004-05)

Primary Articles 22% 20.1%

Fuel & Power 14.2% 14.9%

Manufactured 63.7% 65%

Products
 CPI is
Consumer a statistical
Price time-series
Index measure
(CPI) of a weighted
average of prices of a specified set of goods and services
purchased by consumers. It is a price index that tracks the
prices of a specified basket of consumer goods and
services, providing a measure of inflation.

Most developed countries (UK, US, JAPAN and CHINA) use

the Consumer Price Index (CPI) to calculate inflation.
Types of Inflation
Types of inflation :
Demand - Pull Inflation
Cost Push Inflation-Aggregate supply is the total
volume of goods and services produced by an
economy at a given price level. When there is a
decrease in the aggregate supply of goods and
services curtail from an increase in the cost of
production, we have cost-push inflation
 Causes of Inflation
There are various factors which cause inflation in
the economy –
Monetary Factors
• Expansion of Money Supply
• Increase in Disposable Income
• Increase in Indirect Taxes
• Drop in exchange Rate
Non-monetary Factors  
Cont…
• Rising Population

• Natural Calamities

• Speculation and Black Money

• Unfair Practices by Monopoly Houses

• Bottlenecks and Shortages

Structural Factors 
• Capital Shortage
Cont…
• Infrastructural Bottlenecks

• Limited Efficient Entrepreneurs

• Lack of Foreign Capital

• Imperfections of the Market

• Unemployment
Global Factors
Cont…
• Increase in International Prices

• Cold War with other countries

• Rise in Fuel Prices

Prices just keep on rising! Food inflation at
15.57%
Last updated on: January 27, 2011 (google
news)
 Updates :

• Today’s food inflation rate is 17.05%(google news)

• Food inflation jumped up by 3.88 percentage points from

14.44 per cent recorded in the previous reporting week,
and edged closer to the high level of 19.90 per cent, last
witnessed a year ago.
• The rise in food inflation has been mainly on
account of 58.58 per cent rise in prices of
vegetables in the wholesale market.

• Among the individual items, onion became

dearer by 82.47 per cent on annual basis, while
egg, meat and fish became costlier by 20.83 per
cent, fruits by 19.99 per cent and milk by 19.59
per cent.
• With food inflation accelerating, RBI may take more measures in
its forthcoming quarterly review of the monetary policy on January
25.

• Meanwhile, in the non-food category, the prices of fibres and

minerals have climbed by 35.53 per cent and 30.58 per cent,
respectively. Rising food prices will reflect on the monthly inflation
data for December, scheduled for announcement on January 14.
Union Finance Minister Pranab Mukherjee on
Monday said he expected the rise in the food inflation
rate to continue till the middle of July, after which he
expected things to improve with the onset of monsoon.
• Mr. Mukherjee said efforts were on to improve the supply
side with the import option being kept open. “For instance,
our pulses requirement is around 18-19 million tonnes.
While we are being able to supply 14-15 million tonnes,
there is still a requirement of 4-5 million tonnes,” he said.

• Initiatives such as increasing the Cash Reserve Ratio

(CRR) from 5.75 to 6 per cent, and the short-term lending
(repo) and borrowing (reverse repo) rates by 25 basis
points each had helped to mop up the excess liquidity
(Rs.12,500 crore) from the markets.
 RBI action may be needed'
• According to a recent Business Standard report, the
Reserve Bank of India might further tighten its monetary
policy if inflation did not come down significantly by the
end of this month, Prime Minister's Economic Advisory
Council chairman C Rangarajan said on Thursday.

• The central bank is slated to review its credit policy on

January 25.

• Rangarajan said RBI's action (likely quantum of rise in

policy rates) would depend on price behaviour, especially
of food items, between December and January. He said if
food inflation persisted, it would feed into general inflation.
"Who is hit hardest by the food price rise? Do the rich
really care about the price of bread? Most of the time,
they eat cake anyway.
• The great Indian middle class suffers a little, of course.
They have to postpone buying the new dress till next
month, turn their paneer days into radish days, and leave
the scooter under its plastic cover, taking the crowded
bus to work instead.
• "But at least they have their radish. What do the poor
eat? They don't pay bus fares, and their new dresses are
postponed forever. Still, they have to eat.
 Why has the price of onions
skyrocketed?
"Unseasonal rains have caused havoc across the nation.
Onion crop being sensitive to water has been damaged
leading to the shortfall in supply and resulting in high
prices," said Changdev Holkar, an onion farmer from
Nashik in Maharashtra who is also a director at the
National Agricultural Cooperative Marketing
Federation of India.
Control measures
Increase agro productivity to control
food inflation
• New Delhi, Feb 4 : Prime Minister Man Mohan
Singh on Friday said food inflation can only
be controlled by increasing agricultural
productivity.
There is a need for a paradigm shift in our
institutional arrangements, for improving the
availability of various commodities to meet the
higher levels of domestic consumption," said
Singh.
 Govt Announces Steps To Control
Food Inflation
• Inter-ministerial group set up under Chief Economic
Adviser Kaushik Basu to review overall inflation
situation

The government announced on Thursday that it will

review import and export of all essential commodities in
its bid to tame spiralling food prices that have fuelled
rapid inflation. Stringent action against hoarders and
black marketers manipulating market prices will
continue.
 RBI raises rates, warns on food
inflation

• A series of steps have been taken by RBI

by adjusting the crucial rates. Recently it
has announced another 25 basis points
increase in repo and reverse repo rate.
• The RBI in its third quarter monetary policy
review recently hiked its repurchase or
repo rate to 6.5 percent from 6.25 percent
and reverse repo rate to 5.5 percent from
5.25 percent.
 RBI steps to control food inflation
• The RBI raised key policy rates on Tuesday and raised
its March-end inflation estimate to 7% from the earlier
5.5% and cautioned that there could be a possible
spillover of high food prices to a generalized inflation.

"These steps the Reserve Bank had to take to give a

strong signal to tackle the inflationary pressure which is
in the system. On the one hand we will have to control
inflation and strong signal should be given. Supply
management has to be tackled. Supply bottlenecks have
to be removed," Mukherjee told a news conference.

Policymakers had earlier said inflation would settle in the

6% to 6.5% range.
 Reasons for high Food Inflation
• Low production and productivity
• The prevailing market inefficiencies – lack of
coordinated efforts in public procurement
• Poor distribution
• Wastage due to inadequate and poor storage
facilities
• Inefficient public distribution system
• Speculative trading
• Increasing retail margins
 Some Prescriptions
• The release of food grain stocks together with faster
distribution.
• Part of Foreign Exchange Reserves can be used for bulk
import of essential commodities.
• Improving food production and productivity.
• Promoting Private sector Participation in Food grain
Management.
• Foreign Direct Investment (FDI) in food retailing
 PUZZLING FOOD INFLATION
 The last couple of month witnessed a sudden
and almost a run-away of food inflation. The way
the prices of vegetables and other food items
soared, it created doubts in the minds of the
common people and the economists.
 In winter generally fruits and vegetables are at
the lowest price. This was not so this time. The
prices were way above the expected normal
 Unseasonal rains during the October-November
harvesting season for onions in key growing
states of Maharashtra, Andhra Pradesh,
Karnataka and Tamil Nadu spoilt much of the
summer crop which led to a supply shortage.
 The govt. has raised the support prices of some
food items. This along with the rural employment
schemes and rural urban salaries infused
excess money in the market causing inflation
 Wastage – leading to shortage. Even the
government’s huge buffer stock lies
unused. Why doesn’t the govt. release its
buffer stock on the time to check shortage
and food inflation?
 Monetary policies – temporary remedies.
There are certain deeper grass root
causes which have to be actually tackled
 Problem of middlemen
 There is a huge difference between the cost of
production and the price the final consumer pays.
The farmer gets a very very small amount of this
difference of cost and final price
 For eg:- if we are buying a vegetable for Rs. 40 per
kg., the dealer at the wholesale market gets Rs. 10
per kg., and the poor farmer gets a meager Rs.3.
Again this Rs. 40 too will differ depending on the
locality it is being sold. Then there is always the
problem of black marketing and illegal stocking of
goods to get a higher price.
 Need to checks on the middlemen and
the retailers
 The system of direct farm to shops has to
be developed, so that the farmers are the
beneficiaries. This will also motivate the
farmers to increase the production.
Thank you