One of the many challenges in the next fiscal year, beginning July 1, is a possible rise in food inflation. And, containing that rise will not be easy.

Food prices will presumably continue to reflect the impact of the rupee depreciation in this fiscal year. An increase in interest rates, on the other hand, will add to the cost of finance for businesses which can be expected to be passed on to the consumer.

A sudden hike in the price of fuel oils, about five per cent in case of petrol, enforced from mid-June, is sure to create inflationary pressure in the entire economy including the food producing and distributing sectors.

Even if agricultural production remains up to the mark, “an uptick in food inflation during the next fiscal year cannot be ruled out,” says a senior central banker

So, even if agricultural production remains up to the mark, “an uptick in food inflation during the next fiscal year cannot be ruled out,” says a senior central banker.

What is more worrying is that the State Bank of Pakistan (SBP) cannot contain food inflation the way it can influence general inflation as prices of food commodities and their demand in the economy normally show little response to monetary policy tightening.

“The government of the day will have to be vigilant in food price administration and in conducting fiscal matters with as much concern for inflation, especially food inflation, as for targeted economic growth.”

But that’s a tricky job, particularly in the backdrop of the existing large fiscal imbalance and in a year of scheduled political transition. Isn’t it?

Unlike general inflation, containing food inflation is trickier because higher food prices cannot and normally do not result in reduced demand, at least not widely. Higher general inflation can discourage you from buying an expensive car but higher food inflation cannot discourage consumption of pricier food on a wide scale and in the short term.

Besides, whereas higher prices can result in reduced demand of branded, packaged food products among people of a certain income group, even that group cannot cut down on consumption of basic food items.

Fertiliser prices have gone up by as much as 15pc after the recent rupee depreciation, according to a report in a local daily. Another report, published last week in Dawn, gives details of meat and chicken prices partly attributable to Eid and partly to the rupee’s fall.

A random survey of Karachi’s main commodities’ market Jodia Bazar and several other wholesale and semi-wholesale markets show prices of all food items recorded a sharp increase in June. Even after discounting for Eid, part of the price hike is sure to stay as a weaker rupee has made imported essential food items like pulses and tea and powdered milk pricier.

And increase in fuel oil prices, enforced also in June, has added to the cost of transportation of all food items from fields to the markets, traders at Jodia Bazar say.

In the absence of more realistic, more inclusive gauges of food inflation, the sensitive price index (SPI) appears to be a good indicator of movements in commodity prices. According to the latest data, during the week ending on 13th June, annualised inflation measured through this index stood at 3.6pc.

Regardless of the fact that the composition of this index is not representative of the food items we use daily and regardless of the deficiencies in prices collection mechanism, SPI cannot hide inflationary pressures unless data is tampered with. So, in the next fiscal year a close watch on SPI movements can give us an idea of how food inflation is behaving.

June stats for annualised food inflation will be available next month “but in all likelihood it will be higher than in May,” says another senior central banker. “What is more important to watch is whether we see a reversal of the declining trend. If that happens, it can translate into higher retail commodity prices (or higher food inflation).”

Production of major and minor food crops i.e. wheat, rice, sugarcane and pulses (including gram, vegetables and fruits) play an important role in steering food inflation.

If their output remains high, producers normally have to absorb part of the increase in the cost of production and food inflation does not accelerate very fast. But a shortfall in production of food prices following the rupee decline (which increases the cost of imported inputs), and increase in fuel prices (which makes transportation costlier) will inevitably lead to higher food inflation.

However, since the supply of perishable food items i.e. vegetables and fruits remain erratic their prices, too, are bound to fluctuate widely; given the fact that cost of production has started rising, keeping these prices in check will be difficult.

Over the last few years, consumption of dairy, meat and other animal products has been rising rapidly. Since this trend looks sustainable given the strength and the nature of demand, the price of milk, curd, meat and poultry is sure to show an upward trend in the next fiscal year with little at the dispensation of the next government to the rise.

Higher food inflation seems a certainty in FY19. How the next government handles this will be interesting, and hopefully educating, to watch.

Published in Dawn, The Business and Finance Weekly, June 25th, 2018