Spot food prices tell a story

Spot food prices tell a story
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First Published: Mon, Mar 10 2008. 11 50 PM IST
Updated: Mon, Mar 10 2008. 11 50 PM IST
Food price data in India is a bit of a puzzle. There is market data from the major commodity exchanges and there is official data from the government— and rarely do the twain meet.
First, take a look at what the price data from the commodity exchanges is telling us. Almost exactly three months ago, the index of spot prices for agricultural commodities traded on the Multi Commodity Exchange (MCX) went ballistic. The index has shot up by 14.6% since 8 December 2007. That would translate into an annual price rise of 70%, in case the current surge in the prices of agricultural commodities is sustained over the next three quarters. (Of course, it may not.)
The annual rise in the MCX agricultural commodities index is a more modest 13.68%. This means that most of the increases in food prices over the past year have been concentrated in the past 12 weeks.
This is not good news for those who worry—quite reasonably—that food inflation can become a huge social and political worry. India’s official wholesale price inflation has crossed the 5% mark in the first week of January, according to the latest numbers released on Friday. This is out of the Reserve Bank of India’s comfort zone.
And there could be worse news ahead. The MCX price data suggests that the next few inflation releases from the government could show a steep jump in food prices.
The problem, as we noted at the very beginning of this editorial, is that there seems to be very weak correlation between spot prices in the commodity exchanges and the price data in the official inflation numbers. The two have moved quite independently of each other over the past year.
Part of this may be explained by the fact that commodity exchanges and government statisticians collect data from different mandis, or markets, and give different weights in their respective ­indices. But there should be some correlation in the long run. In case there is, then the recent spike in spot prices of food items in the commodity exchanges should be considered as advance warnings of a worsening inflation threat. Otherwise, it is an intellectual puzzle that should only ­concern statisticians and economists.
Are spot food prices telling us that inflation is about to accelerate? Write to us at views@livemint.com
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First Published: Mon, Mar 10 2008. 11 50 PM IST