Food Inflation: What Stimulates It In the Short-Run and the Long-Run?

By Abedullah and Junaid Nasrullah

Food inflation takes money from the pockets of consumers and poor segment of society that are more vulnerable to it as they spend major share of their income on food items to meet daily dietary needs. Persistent food inflation erodes the buying capacity of the poor, resulting in compromises in budget allocation for sufficient nutrients intake, health and education. Hence, policy-makers are more concerned about price hike in food bundles as it directly affects the poor and preferably trying to break its persistence by providing relief. Factors affecting food inflation can be categorized into two groups; i.e. short-run and long-run.

Factors responsible for food inflation in the short-run

Currency Devaluation

Without any doubt global food inflation has badly affected the economy of developing countries including Pakistan, but the contribution of devaluation of the Pakistani Rupees remains dominant in Pakistan’s food inflation. Devaluation lead to price hike of all imported items such as crude oil, soybean, chicken feed, DAP, vegetable seeds and different kinds of pesticides. The increase in prices of these imported items shift the cost of production of agriculture commodities. The prices of imported DAP fertilizer increased by 92 percent, directly affecting the cost of production of agriculture produce.

Imports

Similarly, imported sugar and wheat prices increased by 88 and 26 percent respectively and it also increased the prices of locally produced sugar and wheat. These are necessary items and people consider it as a benchmark. Hence, any escalation in wheat prices will automatically leads to hike in food prices across the board. Also, 76% price increase is observed in imported palm and soybean oil. It is important to note that 60% share of consumption comes from imports.

Inputs

Likewise, energy prices increasing by roughly 16 percent per annum has not only increased the cost of food production but also of processing and preserving it. Energy accounts for between 20 to 30 percent of absolute agriculture costs. Being an oil importing country, sharp incline in energy prices has hurt the economy in all aspects. Particularly so through food inflation due to high share of energy in food and agriculture costs.

Since 2019 Pakistan has failed to bring down food inflation from double to single digits. This has badly hit the poor segment of society. Their calorie intake has suffered because income levels are now insufficient to meet their food needs. Although national inflation showed drop-off but remained high on account of food items observed in most months since mid-2019 as high as 23.6 percent in January 2020, followed by 17.8 percent and 15.9 percent in mid of 2020 and 2021, respectively.

Key items responsible for food inflation since 2019 are: chicken (90%), cooking oil (88%), sugar (83%), tomatoes (80%), eggs (45%), chilies (30%), and wheat and milk, (15 to 25%). Similarly, petrol and diesel prices increased annually by about 14 and 8% respectively. And per-unit rate of electricity has jumped to 16% percent per annum during the same period.

Supply Chain Disruptions

The supply-chain disruption due to COVID-19 also contributing to food inflation. Closure of restaurants and marriage halls suppresses demand, leading to cutting off of supply due to decline in prices. Agricultural revival required time to complete production cycle to catch up increasing demand. Many farmers are now reluctant to grow vegetables under controlled environment because of the loss they faced during the pandemic. Producers follow markup pricing to retain their earnings contributes additional pressure on food prices. Fiscal stimulus through the Ehsas support program – demand-side upsurge in consumption – to feed poor households, further widens the demand-supply gap. This leads to more inflationary pressure on food items.

Factors Contributing to food inflation in the long-run

Government footprint in input-output markets

The government interference in input-output market leads to inefficient cropping patterns. For example, support price of wheat and sugarcane create disadvantages for competing crops. Procurement of major share of marketable surplus of wheat by the government and barriers/restrictions in importing wheat leading to market inefficiency which appears in terms of high prices to consumers. However, government can keep a minimum strategic reserves to play a role of a regulator to keep the prices in acceptable range.

Similarly, fixing canal water prices at negligible levels favors water-intensive crops (rice and sugarcane) rather than more profitable crops (fruits, vegetables, cotton). Government presence in input-output markets changes farmers’ preferences towards certain crops (wheat, sugarcane and rice) since competing crops lose comparative advantage due to market distortions. This create gap between supply and demand for certain commodities, pushing the prices upward and thus contributes in food inflation. Hence, reduction of government footprints in input-output markets could help to minimize the food inflation in the long-run.

Low spending on R&D

Analysis of 40 years of crops yields indicates that only grain crops and sugarcane have had positive growth. Other crops such as fruits, vegetables, oil seed and nuts and pulses all have negative or negligible growth in yields. This demonstrate that additional production is achieved through area expansion which has reached to its maximum limit. Hence, further growth in agriculture sector is only possible through innovation and adoption of technology. But currently this process is extremely slow due to very little spending on R&D (less than 1% of GDP).

The demand-supply gap is increasing dependence on imported food items which are becoming more expensive due to our currency devaluation. To control food inflation in the long run, Pakistan must bridge this gap by addressing supply. We can enhance our production levels by investing more in R&D, leading to innovation and adoption of new technologies.

Final Thoughts

Devaluation of PAK Rupee and increase in oil and electricity prices are short-run factors mainly responsible for food inflation. COVID-19 pandemic also responsible to contribute in food inflation. However, among the long-run factors responsible for food inflation include heavy government footprints in input-output markets and little spending on R&D to achieve sustainable growth in agriculture production. Short-run factors are mostly relating to macroeconomic situation and recent pandemic in the country which are beyond the control of policy makers. However, food inflation in the long-run can be controlled by minimizing the government footprints and increasing targeted spending on R&D.


About the authors:

  1. Abedullah is Chief of Research at PIDE
  2. Nasrullah is PhD Research Fellow at PIDE

One comment

  1. PIDE is premier research institution of Pakistan and contributes valuable research papers to guide policy makers, research students and academia.
    In the article “Food Inflation: What Stimulates It in the Short-Run and the Long-Run?” author explained factors affecting food inflation correctly and policy makers should heed to his suggestion.

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