Accumulation of food price pressures threatens inflation outlook: RBI Bulletin

“The accumulation of food price pressures threatens the outlook for inflation in the form of spillovers to wages, rents and expectations,” the ‘State of the Economy’ article published in the RBI’s July bulletin said.

The RBI article has been prepared by the RBI Deputy Governor Michael Patra and other central bank officials. The RBI said the views published in the article are of the authors and not of the institution.

Headline inflation, as measured by year-on-year (y-o-y) changes in the all-India consumer price index (CPI), edged up to 5.1 per cent in June 2024 from 4.8 per cent in May. The month-on-month increase in overall CPI was on account of positive momentum of 269 bps (basis points) in food, 6 bps in fuel and 12 bps in core group (i.e., excluding food and fuel). One basis point is one-hundredth of a percentage point.

Food inflation (y-o-y) firmed up to 8.4 per cent in June from 7.9 per cent in May as the positive price momentum more than offset a favourable base effect.

The article said that high frequency food price data for July so far (up to July 12) show that cereal prices increased, mainly driven by wheat. Pulses prices also registered an increase, mainly due to gram and arhar/tur. Edible oil prices too recorded increases, especially mustard and groundnut oils

“The argument that food price shocks are transitory does not seem to be borne out by the actual experience over the past one year – too long a period for a shock to be termed as transitory,” the article said.

Superimposed on this ‘persistent’ component are sporadic spikes in prices of a range of vegetables that overlap across constituents to give the broader category of vegetables inflation an enduring character, it said.

“Food prices are clearly dominating the behaviour of headline inflation and households’ inflation expectations, undermining the gains of lowering core and fuel inflation through a combination of monetary policy and supply management,” it said.

While households’ current perception of inflation has been moderating, this is not being reflected in their three months ahead and one year ahead expectations which remain elevated, it said.

On economy, the article said the country’s economy sustained a strong growth momentum, despite geopolitical headwinds and some build-up of supply chain pressures.

Domestic demand conditions have remained robust during Q1 of 2024-25 as evinced by movements in high frequency indicators. E-way bills grew by 16.3 per cent (y-o-y) in June 2024, with sequential growth, both inter- and intra-state. Toll collections increased by a strong 37.4 per cent (y-o-y) in June 2024. Automobile sales recorded a growth of 18.2 per cent (y-o-y) in June 2024, led by two-and-three wheelers followed by passenger vehicles, even as growth for entry level vehicles continued to remain weak. With improving farm sentiments, domestic tractor sales reached an eight-month high in June 2024, with total volumes surpassing the one-lakh mark.

“The improvement in the outlook for agriculture and the revival of rural spending have turned out to be the bright spots in the evolution of demand conditions,” the article said.