This paper discusses the impact of the surge in food prices on the general price level. This paper explores the fact that how rises in food prices lead to inflation. A rise in food prices is a cost-push type of inflation, thereby creating a negative shock in an economy which lead to inflation and a decline in national output. Nowadays there are several factors for surges in food prices. This increase in food price act as cost-push inflation and as a consequence, there is an upward shift in Aggregate Supply and due to this shift, Aggregate Supply falls short off Aggregate Demand. The excess Aggregate Demand creates upward pressure on General Price Level and price start rising till Aggregate Demand decreases and become equal to Aggregate Supply. Thus, due to a rise in food prices, inflation and downfall in national output take place simultaneously. However, there is another process of the wage-price spiral which turn expected inflation into actual inflation. Rise in food prices is one of several factors of the wage-price spiral process. Workers in expectation of inflation start demanding higher wage rates to maintain their real consumption power. Due to an increase in workers’ income, Aggregate Demand rises. Hence wage-price spiral lead to upward shift both in Aggregate Supply and Aggregate Demand which ultimately lead to inflation with no increase in national output. Government may try to bail out the economy from the problem of rising in food prices by giving food subsidy. Food Subsidy although inflationary by nature but creates positive shock in an economy thereby leading to an increase in national output. However, the impact of food subsidy is negated by wage-price spiral thereby hindering an economy to fully leverage the positive shock of Food Subsidy. Hence Government through its policies should try to create an environment of trust in the economy so the process of wage-spiral does not initiate in the economy and its policies achieve the desired outcomes.

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Keywords: Cost-Push Inflation, Food Subsidy, General Price Level, Inflation, Wage – Price Spiral.

JEL Classification: E30, E31, H25, O13, Q11