Opinion Express View on inflation: A sticky surge

On Tuesday, data released by the National Statistical Office showed that retail inflation, as measured by the consumer price index, eased below the 7 per cent level, falling to 6.83 per cent in August. The decline was driven largely by lower food inflation — the consumer food price index fell to 9.94 per cent in August from 11.51 per cent in July. The disaggregated data shows that this decline was in large part due to vegetables. Vegetable inflation fell from 37.4 per cent in July to 26.1 per cent in August. As per ICRA, this fall contributed around 28 basis points of the 61 basis point decline in headline CPI. Inflation, however, continues to remain elevated in cereals (11.85 per cent), pulses and products (13.04 per cent), spices (23.19 per cent) and milk and products (7.73 per cent). There are indications that upside risks to food prices linger on.

In its last meeting, the monetary policy committee had opted to maintain status quo on rates, choosing to look through this surge in inflation. The view was that the price shock from vegetables was short-term in nature, and that price pressures would recede. However, there are now indications that high food prices may not be transitory. For one, the monsoon continues to be deficient. And a strengthening El Niño in the coming months could potentially impact the upcoming rabi crop. This would suggest that even as vegetable prices may correct, food inflation could prove to be more sticky than previously anticipated, due to higher prices in other categories. The government has taken several steps in recent months to curb prices. It has decided to offload 5 million tonnes of wheat and 2.5 million tonnes of rice in the open market, imposed stock limits on urad and tur, enacted export bans on wheat, non-basmati white rice and sugar, announced the sale of tomatoes at discounted rates, and imposed a 40 per cent duty on onion exports. However, this supply side induced inflation shock requires deft supply side management. Imports must be eased, and the policy of imposing stock limits must be reexamined.

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Most analysts expect inflation to fall further in September, as vegetable prices correct. However, for the entire second quarter (July-September) inflation is likely to average above the RBI’s forecast of 6.2 per cent. Considering the uncertainty in the trajectory of food inflation, the MPC is likely to maintain the status quo when it meets next in October. But, sustained food inflation could spill over, raising the possibility of inflation becoming generalised. Such food price shocks could also impact household inflation expectations. There is also the hardening of crude oil prices to contend with. This will complicate the policy choices before the MPC, going forward. How the growth-inflation trajectories evolve will determine the course of policy action.