A Study on Dynamics of Food Inflation in India

Abstract

The role of food prices is vital for people living in low- and middle-income countries like India as they spend a high share of their income on food items. As the earlier literature suggests, there can be interlinkages between food prices, non-food prices and rural wages. Therefore, this study’s first objective was to empirically test the relationship between (1) food prices and non-food prices based on consumer price index (CPI). The second objective of the study was to test the relationship between (2) food prices based on both CPI and WPI (wholesale price index) and rural wages (agricultural and non-agricultural wages). The time series econometric technique for monthly data available from January 2015 to March 2020 is used to arrive at the findings. The study found no long-run relationship between food and non-food prices. Also, no long-run or short-run relationship is found between food prices and rural wages. However, the impulse response function graphs suggest that food prices and non-food prices are affected by their own lagged prices, and short-run transmission runs from non-food prices to food prices in opposite directions in both urban and rural areas of India. Since we find that food prices are affected by their own lagged prices and non-food prices in the short-run only, the interest rate policy of RBI, which is supposed to influence the prices of non-food sectors faster, has limited capacity to influence the prices of food sectors in the long-run. JEL Codes: E4, E6, 02