In just over three months, Brent crude prices have soared from under $70 to nearly $86 per barrel. Rising energy prices have spurred demand for bio-fuels. Crude palm oil is trading at a record 5,000 ringgits per tonne in Malaysia, from 4,200 ringgits in mid-July. Similarly, raw sugar in New York has crossed 19 cents per pound, from already elevated 17.5 cent levels three months ago. The Food and Agricultural Organisation’s world food index had eased to 124.4 points in July, after touching 127.9 in May, its highest level since September 2011. But it rose again to 130 points this September, marking a 10-year-high. The same story — of renewed global price increase from July dips — has been repeated for skimmed milk powder. And the ruling benchmark Cotlook ‘A’ index rates of 120 cents per pound for cotton were last seen in July 2011.
Simply put, commodity inflation is back. That may not be bad for producers, including farmers. Soyabean is selling at Rs 5,100-5,200 per quintal in Madhya Pradesh’s Ujjain mandi, well above the government’s minimum support price (MSP) of Rs 3,950. This applies also to raw un-ginned long staple cotton (Rs 7,200 versus Rs 6,025/quintal) and to some extent groundnut (Rs 5,700 versus Rs 5,550/quintal) at Rajkot in Gujarat. Basmati paddy growers in Haryana are realising Rs 3,000-plus per quintal rates in the ongoing marketing season, which is higher than the Rs 1,960 MSP for non-basmati varieties. Even international wheat prices today, at $300-350 per tonne depending on the country of export, are above India’s MSP of Rs 2,015 per quintal ($269/tonne). But for farmers, all this isn’t unqualified good news. They are paying roughly a third more for diesel than a year ago. Higher energy prices have rubbed off on fertilisers as well. Their global prices are anywhere from 10 to 13-year highs now, even as there are reports of desperate farmers raiding trucks carrying di-ammonium phosphate.
Central banks, including India’s, have largely been viewing the current inflation as transitory and caused by the post-Covid supply chain disruptions. Having learnt from the 2013 “taper tantrum”, they wouldn’t want to withdraw stimulus or close monetary spigots too quickly. But when fuel and food prices stay high for long, they feed into inflation expectations of consumers, producers and investors. All discussions about “transitory” or “core” inflation, then, become purely academic. Anchoring inflation expectations is important. The government must play its part by slashing excise duties on petrol and diesel. It can restore them later, when supply response to the vaccine-induced global demand surge would also have hopefully kicked in.
This editorial first appeared in the print edition on October 25, 2021 under the title ‘Fuel and food’.