Consider. During 2017-18, 12-month average inflation (Jul – Jun) stood at just 4.7 percent. Of these 4.7 percent, only 1.12 percent – or less than a quarter – was contributed by the food group (including both perishable and non-perishable commodities). During FY23 to date (Jul – Feb), headline inflation has averaged at 26.2 percent, of which 12.64 percent – or nearly one-half – has been contributed by the food group.
Take a moment to process the magnitude of destruction that has hit purchasing power of ordinary consumers over the last five years. Not only has the rate of average annual inflation jumped over 5 times, the share of food group in headline number has also doubled. And this isn’t 2020, when contribution of food group soared to 55 percent due to supply-side distortion in select few commodities even as headline CPI had remained contained under 10 percent.
The scale of inflation during the current round is broad based, hitting everything from housing, energy, fuel, power, transportation, health, education, and even recreation with double-digit rise in price level in less than a year. And what many fail to point out: the current cycle comes on the back of already elevated levels over the past 50 months. During this time, monthly inflation has averaged at 13 percent, crossing over into double digit territory in 26 out of 50 months since January 2019. If inflation continues at this pace, price level in the economy would double every five and a half years. For reference, it took seven years for minimum wage to double from Rs13,000 in FY15 to Rs25,000 by FY22 (and that too, not exactly).
But beyond the description of scale and the unprecedented nature of the current cycle, lies how powerful the contribution of food group has become to ordinary household’s monthly budget. Using PBS’ assumptions, the monthly food budget of an average lower middle class urban household - earning hundred thousand rupees per month - has soared by roughly thirteen thousand rupees (assuming no adjustment to consumption) since February 2022. For lower income families, that’s basically equivalent to monthly house rent or expenditure on fuel and transportation. Considering commute to work or housing is more difficult to give up, it may be safe to assume that households up to lower middle class could already be forced to make the hard choices between continuing education or compromising on nutrition.
But as readers navigate between the headlines whether the CPI is “highest in history” or “since 1973”, it may worthwhile to ask if there any supply side policy interventions could be undertaken to blunt the impact. Consider wheat and wheat products (flour, maida, etc) where average contribution to CPI has soared from negative 0.24 percent in 2017-18 to over 8 percentage points over the last several months. Or poultry products, where average contribution has doubled from 3 percent five years ago to nearly 6 percent in recent months.
Over the last 24 months, public sector behavior in food governance has often played the role of exacerbating already difficult circumstances, often worsening the price impact of a supply distortion. Consider, where inability to let go off procurement operations and attempts manage supply has led to a tragic situation where wheat prices are consistently higher in rural settings than urban. In fact, excessive administrative footprint in the wheat market – coupled with higher weight of wheat in rural inflation – is single-handedly responsible for why rural headline inflation has outpaced urban over the past 12 months.
Similarly, misplaced policy goals have led to inflation in poultry products rising from an annual average of 8 percent between 2017 – 2022, to 75 percent in just the last three months! The ban on poultry feed input – soybean and canola – has reportedly led to a situation where grandparents and parents flock are being culled in absence of guaranteed feed supply. The resultant shortage implies poultry alone now contributes 6 percent of headline CPI. Put it differently, had wheat and poultry prices not rose abnormally, the inflation number 31.6 percent could at least be five percentage points lower!
The weighted average contribution of food group commodities deserves a much deeper dive. Over the next month, BR Research hopes to further expand on this effort, further exploring the drivers of rural food inflation specifically. However, even a superficial analysis indicates that while the current cycle is most definitely broad based and driven by currency depreciation, fuel, and energy prices, better informed policymaking – especially in food - can help blunt the impact to a significant degree.
If there is one way to win the elections still, it would be by helping stabilize food prices better, which disproportionately impacts the bottom of the pyramid working and lower income classes. PDM would have no one but itself to blame to let go off this opportunity.
Comments
Comments are closed.