Galloping food prices has become a permanent feature of lifestyles both in the developed and developing world. It is more pronounced in international prices of all major foodstuffs except sugar which rose significantly in 2007, the Food and Agricultural Organisation (FAO) reported.

Among the sharp increase were course grains and vegetable oils , the commodities used heavily in bio-fuel production. Due to the increased demand for cereals for bio-fuel production, falling reserve stocks have led to a surge in prices. The projected wheat stocks for 2007 / 2008 is expected to be the lowest in 60 years, and that too despite increased production, the FAO reported.

Diversion of a significant quantity of cereals for bio-fuels will cause a structural change in demand for food products. Higher food prices are also driven by Asia’s growing wealth and demand for meat and diary products . It requires two kilograms of feed to produce one kilogram of chicken, while the ratio for pork is 4: 1 and beef 7: 1 .

Food prices account for a significant share of total consumer expenditure. The weight of food in the consumption basket varies from country to country, in Ethiopia it is 57 percent, 31percent in China and only 10 percent in the United Kingdom. In Sri Lanka , 47percent of the consumption basket comprises food according to the New Colombo Consumers’ Price Index.

Sri Lanka’s inflation is driven in part by one-off adjustments in price levels due to increases in international food prices. There are a range of strategies adopted by different countries to help vulnerable segments of their populations to cope with increasing food prices. Among them are Increasing production (Malaysia), import duty waivers and reductions( Indonesia, Mongolia, Morocco, Turkey) export bans, taxes and restrictions( India, Pakistan, Vietnam, Serbia, Ukraine, Zambia) and direct subsidies and price controls (China, India, Russia, Argentina, Morocco, Egypt, Mexico. Jordan, Zimbabwe, Senegal)

Sri Lanka allows the price shocks to pass on to domestic prices without direct subsidies, plans to increase agricultural production , import tariff reductions and directed subsidies. Inflation in Sri Lanka reflects the true impact of external shocks unlike inflation in many countries where inflation is partially suppressed through direct subsidies and price controls, the Central Bank of Sri Lanka (CBSL) has reported .

The use of subsidies and price controls to protect domestic prices is highly questionable. If governments use inflationary finance to subsidise selected food prices, it could ultimately raise the overall price level. Moreover the largest beneficiaries of subsidies are the high-income categories who consume more than the poorest segments. Price controls also cause shortages. The most appropriate policy in the long term perspective would be to pass the shocks to the domestic prices except for directed subsidies. This may lead to the politically sensitive issue of higher one-off price increase in the cost of living, which is desirable to long term inflation , CBSL has recommended.