Consumption Patterns in Inflation Numbers

India and most other developing economies in the world are grappling with the issue of rising inflation and soaring food prices. India’s food inflation fell to 16.91% for the week ended January 1, 2011 after rising to 18.3 percent, the preceding week.  As economists and analysts gear up to debate whether the RBI will raise rates by fifty basis points or twenty five basis points, a silver lining can be seen in the spiralling inflation numbers if one gauges through them carefully. 

A closer look at the components of the food inflation index points towards a change in the consumption pattern of the Indian consumer. What have fuelled the price rise are components like vegetables, onions and protein based items 

The Planning Commission Chairman Montek Singh Ahluwalia said to NDTV Profit, “The high inflation number points towards people eating healthier food, better lifestyles.”

Individual items in the food inflation index, egg, meat and fish became costly by 16.70 per cent, fruits by 17.71 and milk by 13.20 per cent per cent annually. The unexpected shoot-up in onion prices due to bad crop also added to the inflationary woes significantly

However, prices of staples like pulses declined by 14.84 per cent, wheat by 4.87 per cent, potatoes by 1.67 per cent and cereals by 0.12 per cent on an annual basis. These commodities are essential in the average Indian’s consumption basket. 

Apart from the fact that there is a significant demand-supply mismatch, it is becoming increasingly important to recognize that India is growing from a developing to a middle income economy. As such it’s imperative that its growth rate and income levels are high, which eventually lead to increase in demand of high-end consumption of both food and non food articles. The Indian consumer is now able to afford healthier lifestyle which raises demand for high-calorie and high-protein food.

The observation calls for concern, however as inflation is a real problem and needs to be tackled with long term structural solutions. Fiscal and monetary steps in themselves are just half-measures. 

Supply side needs to be strengthened to meet the growing demand.