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News Alerts | Skyrocketing prices may be bad news but the worst is yet to come!

Skyrocketing prices may be bad news but the worst is yet to come!

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published Published on Sep 22, 2009   modified Modified on Sep 22, 2009


Between 2005 and 2007, the world saw doubling of the prices of wheat, coarse grains, rice and oilseed crops and they continued rising in early 2008. It has been predicted by an OECD study (2008) that on average over the coming ten-year-period, prices in real terms of cereals, rice and oilseeds are projected to be 10% to 35% higher than in the past decade. This means more trouble for the poor and lower purchasing power in the hands of the masses.

A number of factors have contributed to the recent spurts in prices that include production of cereals and oilseeds remaining somewhat below trend and a strong growth of demand. Increased investment in agricultural derivative markets, coupled with declining levels of stocks, too have worsened the crisis. Droughts in key grain-producing regions of the world, increased feedstock use in the production of biofuels, rapidly rising oil prices and a continuing devaluation of the US dollar have been the other factors that contributed to the international inflation during 2008.

The prices of food items have increased since December, 2008. There has been a 19.6 percent jump in International Monetary Fund (IMF) food price index between December 2008 and June 2009. The recent hike in food prices could be due to a number of factors. The Food and Agriculture Organisation (FAO), in its June 2009 ‘Food Outlook’ points to a reduction in cereal output for the year 2009-10. Stagnation in oilseeds production has been observed in South America. Severe weather has affected the prospect of soyabean supply. Sugar prices have remained high in 2008-09 and increased since December 2008. Speculative futures’ trading has been blamed to have impacted food prices. Experts feel that diversion of oilseeds and cereals like maize for biofuel production would continue to exert upward pressure on prices.

Unlike the scenario at the international level, year-on-year (y-o-y) variations in the wholesale price index (WPI)--a measure of inflation in India--declined during 2009-10 from 0.8 per cent at end-March 2009 to turn negative in June 2009 (-1.2 per cent as on July 11, 2009). This, however, reflected the base effect of sharp increase in prices recorded during the first half of 2008-09.

The National Statistical Commission earlier in 2001 suggested streamlining all the consumer price indices (CPI) to a composite index as prevalent in developed nations so as to accurately measure and tackle price movements.

Presence of food price inflation in the midst of drought calls for immediate action by the government in terms of emergency food distribution and relief programmes and formulation of district-wise agricultural plans.

The links and resources below can lead to the issues and debates surrounding inflation in general, and food price hike in particular:

When speculation matters by Miguel Robles, Maximo Torero and Joachim von Braun, IFPRI, February, 2009, http://www.ifpri.org/sites/default/files/publications/ib57.pdf

Food and financial crises: Implications for agriculture and the poor by Joachim von Braun, IFPRI, December, 2008,  http://www.ifpri.org/sites/default/files/publications/pr20.pdf

Rising Food Prices Causes and Consequences, OECD (2008),
http://www.oecd.org/dataoecd/54/42/40847088.pdf

Chapter VI: Price Situation, Macroeconomic and Monetary Developments First Quarter Review 2009-10, http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/6PSMMDJU09.pdf

‘Disturbing’ divergence in WPI, CPI inflation, The Hindu, 8 September, 2009,
http://www.thehindu.com/2009/09/08/stories/2009090860341400.htm

The Threat of Drought-driven Inflation by CP Chandrasekhar and Jayati Ghosh, 24 August, 2009, http://macroscan.com/fet/aug09/fet210809Drought.htm

Inflation: perception and reality by Kannan Kasturi, 27 May, 2009,
http://www.indiatogether.org/2009/may/eco-inflation.htm

India inflation falls but food prices up amid drought, Relief Web, 20 August, 2009,
http://www.reliefweb.int/rw/rwb.nsf/db900sid/MUMA-7V68AA?O
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