What is Food Inflation?
Well, the meaning of food inflation is in its name itself. Going by the definition, the condition of an increase in the wholesale price index of a necessary food item relative to the general index or the consumer price index (CPI) is referred to as food inflation. In layman’s language, it is basically the rise in the cost of an essential food item relative to the previous price. Food inflation has two meanings; it means one thing in the developed countries and another for the underdeveloped/developing countries. In the developed countries, the rise in the food prices causes a small inconvenience, something to groan about. While an increase in the food prices in developing countries, the people might not get sufficient amounts to eat and might as well starve for food. Food inflation is quite volatile. The volatility actually depends on agricultural prices as the change in the weather, supply, and demand in the agricultural sector tend to vary.
What causes Food Inflation?
There are several causes of food inflation. But, looking at it closely, it drops down to around four to five that are mentioned below.
- Climate changes top the list in the cause for food inflation. Change in the climate results in extreme weather conditions. It causes greenhouse gas emission and accumulates the heat in the atmosphere and hence causes the temperature to rise. The hot air starts to absorb more moisture content in the atmosphere. Water from the lakes and rivers evaporate, and the land dries up. And when it rains, the water does not get absorbed but instead runs off the soil and causes floods. Therefore, agriculture gets affected by it, and hence, the food prices rise.
- Transportation is another factor that causes food prices to inflate. As the oil prices increase, transportation prices also increase and eventually the food prices as well.
- Corn is now being used as a biofuel. Most of the corn production is used up in the production of bio-fuel and corn production as a form of eatable is significantly less. Hence, inflation.
- The demand for meat has raised quite a lot over the years. So, the animals which feed on meat, now feed grains. Therefore, crop demand increases while supply is less. Hence, inflation in prices.
Effects of Food Inflation
The primary effect of food inflation is the inflation in consumer price index (CPI) where CPI is an index that measures that change in the price level of a market basket of consumer goods and services. It must be noted that food inflation affects differently for different people. The ones that are negatively impacted are those who import a large amount of food and the households who spend a significant amount of their income on food. Contrarily, the ones who export food items are much affected by the increase in food prices.
The economy of the country is affected by the rise in food prices. It can have good and bad effects as well. If inflation is at a moderate level, the economy may sustain. But, if the food prices rise higher, the economy is severely affected. This situation is usually seen to happen in developing countries. The food inflation also affects GDP growth. Not significantly, but it is one of the factors that affect it.
A reliable source of information on Food Inflation
Food inflation reports can be beneficial to economists for several reasons. The inflation numbers are different in different countries. They also affect them differently for different economies. There are web portals that provide this information. A list of links has been provided below for some major counties. The site contains data on the actual inflation rate, historical values, graphical representation, upcoming news, etc.
What do traders care about Food Inflation and what are its impacts on currency?
Food inflation alone might not be beneficial to traders and investors. We know that food inflation affects the Consumer price index (CPI) and also the GDP growth of a country. Hence, traders and investors are more keen on the reports of CPI and GDP numbers. These reports in-turn determine the economy and hence, prove to be helpful to them. Food Inflation is one of the factors that go into the inflation rate. So, we can say that food inflation and inflation rate go hand in hand. With respect to the impact on the currency, it is seen that, increase in the food prices, to an extent increases the inflation rate, and hence, an increase in the inflation rate depreciates the currency value. Note that food inflation is just one of the factors for the changes in the inflation rate. Therefore, strictly speaking, it cannot be ascertained that an increase in food prices, depreciates the currency.
Frequency of release
The food inflation numbers are measured in percentage. And these values are released usually on a monthly basis. For most of the major countries like the USA, Canada, Switzerland, Japan, New Zealand, the United Kingdom, and the Euro area, the frequency of release is around 30 days. While in Australia, the reports are released every quarter.
In the underdeveloped and developing countries, an increase in the food prices will have quite a significant impact on the economy and the lives of consumers in the coming years. The increase is not steady but rather volatile. As discussed previously, the leading cause is due to the change in the climate. Its high time people realise that climate change is real has an adverse effect on food prices. Coming to the economy, food inflation is bringing down the GDP of the country. Therefore, ways must be laid to decrease the food inflation rate. Else, it will continue to create an imbalance in the economy of a nation.