Context:

The Reserve Bank of India (RBI)’s Bulletin for August 2024, highlighted the growing impact of climate change on food prices. 

Key Highlights: 

• RBI findings reveal that food prices are now mainly driven by supply disruptions due to erratic weather and extreme climate events rather than the traditional demand-supply matrix.  

Impact on Food Prices:

• The disruption in crop production due to climate events has led to a steady increase in food prices.
• Average food inflation doubled from 2.9% (2016-2020) to 6.3% in the 2020s due to overlapping supply shocks from climate events, which have disrupted monsoon patterns, raised temperatures, and impaired crop growth.
• Food inflation has become widespread over the past four years, with 57% of months between June 2020 and June 2024 reporting rates above 6%. 
• Persistent climate-related supply disruptions have made this inflation endemic rather than temporary.

Global and National Impact:

• Studies predict that global warming will exacerbate inflation, with a more pronounced effect in developing countries like India.
• By 2035, India's food inflation is projected to increase by 2%, and overall inflation by 1%.
• The ongoing 'cost of living crisis' since 2021 has led to reduced food consumption, impacting health and nutrition security.

Impact on Child Health:

• Researchers Derek Headey and Marie Ruel from the International Food Policy Research Institute estimate that food inflation significantly contributes to the stunting of children aged 24-59 months.
• A 5% increase in food prices during the prenatal period raises the risk of stunting by 1.6% and severe stunting by 2.4%.

Challenges:

• Climate change is disrupting the traditional demand-supply matrix, impacting crop production and causing supply-side challenges.
• Consequently, food inflation has become 'endemic' and can't be managed through conventional price controls."
• This new reality poses Dual challenges, as small marginalized farmers face income loss from crop failures, while high food prices restrict access to a balanced diet, harming nutrition.

About Inflation

• It refers to the general increase in prices of goods and services or the money supply, both of which can cause the purchasing power of a currency to decline.
• Food inflation refers to an increase in the price of food items over time. 
• The year-on-year inflation rate for July 2024, based on the All India CPI, is 3.54% (provisional), with rural inflation at 4.10% and urban inflation at 2.98%.
• It is calculated as the percentage change in the CPI or WPI over a specific period, such as month-over-month or year-over-year.

Indicators for Measuring Inflation 

Consumer Price Index (CPI): It refers to the rate at which the prices of goods and services purchased for personal use rise over time.

• It tracks the average price change of a basket of goods and services items consumed by households, also known as retail inflation.
• Four types of CPI indicators which are CPI for Industrial Workers (IW), CPI for Agricultural Labourer (AL), CPI for Rural Labourer (RL), are compiled by the Labour Bureau, Ministry of Labour and Employment, CPI for Urban Non-Manual Employees (UNME) is compiled by the NSO, Ministry of Statistics and Programme Implementation.

Base rate of CPI is 2012

• Wholesale Price Index (WPI): Tracks the average price change of goods at the wholesale level, serving as an indicator of inflationary pressures in the supply chain. The base rate is 2011-2012.

Types of Inflation

Based on Causes

1. Demand-Pull Inflation: Occurs when the demand for goods and services exceeds the economy's ability to produce them, leading to higher prices. This can be caused by factors like increased consumer spending, government expenditure, or export growth.

2. Cost-Push Inflation: Happens when the cost of production increases, leading to a decrease in the overall supply of goods and services, pushing prices higher. This can be caused by rising costs of raw materials, labor, or energy, as well as supply chain disruptions or regulatory changes.

Based on Persistence

1. Core Inflation: Measures the long-term trend in the price level by excluding volatile items like food and energy prices.

2. Headline Inflation: Includes all items in the consumer basket, including food and energy.