Food Price Inflation and Relative Price Variability in India: Evidence from Decomposition Analysis

Abstract

The present study examines the decomposition of relative price variability into two components (i.e., inflationary and real factors) in India using monthly data on 105 commodities prices over the period January 2005 to March 2017. The analysis of the study revealed that under primary food articles, 53% of relative price variability is due to real factors, and the remaining 47% due to inflationary factors. Whereas for manufactured food products, 30% of relative price variability is due to real factors, and the rest of the 70% due to inflationary factors. Overall, the important conclusion that emerges from the analysis is that few commodity prices have a larger contribution to relative price variability in the food basket. The majority of commodity prices under primary food articles have a larger contribution to variability in relative price changes, whereas under manufactured food products have the least contribution. Moreover, this study also accounts for wholesale price index and consumer price index non-food commodities to identify to which extent relative price variability is determined by real and inflationary factors. JEL Classifications: E30, E31, Q11, L66