Food inflation and volatility in India: trends and determinants

We analyze behavior of food prices in India during the last decade at a disaggregate level. Systematic decomposition shows that eggs, meat, fish, milk, cereals, and vegetables are the main contributors to food inflation. Fruits and vegetables showed a much higher short-term volatility in prices. All the major contributors possess a higher weight in the consumption basket, indicating that the weight of a commodity has much larger bearing on its overall contribution to food inflation, as compared to other factors such as base effect or percentage change in prices (inflation). The inflation-volatility patterns reveal that the commodities that have higher income elasticity of demand but have limited processing and storage facilities, such as fruits and vegetables, are characterized by higher volatility. Econometric analysis shows that while cereal and edible oil prices appear to be mainly driven by supply-side factors such as production, wage rates, and minimum support prices, for pulses, the effects of supply and demand factors appear almost equal. On the other hand, prices of eggs, meat, fish, milk, and fruits and vegetables appear to be driven mainly by demand-side factors. Price projections show that the eggs-meat-fish-milk group shows the highest increase because of the higher income elasticities of demand and the rapid increase in India's per capita income in the recent years.