While the latest data shows that wholesale price inflation (WPI) increased to a 23-month high of 3.55 per cent in July — from 1.62 per cent in June — as vegetables, pulses and sugar turned costlier, there are indications that prices may moderate in the near future.
The reason for high inflation is the base effect and spike in prices of vegetables and pulses. The sharper-than-anticipated increase in food prices has pushed up the projected trajectory of inflation over the rest of the year. Prices of pulses and cereals were rising and services inflation remains somewhat sticky. The partial delay in the monsoon over many parts of the country also delayed the sowing of the kharif crop.
There are indications, however, that the prices of vegetables are moving downwards. “Going forward, the strong improvement in sowing on the back of the monsoon’s steady progress along with supply management measures, augers well for the food inflation outlook,” said the Reserve Bank in its latest monetary policy review last week. The RBI looks at consumer price inflation (CPI) while formulating its policy, saying CPI inflation is a better indicator than the WPI.
The outlook for food prices is also encouraging. First, progress of pulses sowing has been very good (+40 per cent year-on-year) and should ideally result in a bumper crop. Historically, it has been observed that a sharp improvement in pulses results in this component being in deflation for some time.
Second, international food prices have started to soften with corn, wheat and soyabean all correcting by 15-20 per cent in the past one month. Third, petrol and diesel prices have been cut in August with perhaps more to follow. Fourth, post August, the adverse base will start reversing and also help push inflation lower.
The good monsoon this year will provide much needed relief. “We expect pulses and vegetables inflation to cool off. The moderation in food inflation should result in CPI being below 5 per cent by March 2017,” said a report by Edelweiss.