‘Flare-up in vegetable prices stalls overall disinflationary trend’
- Consumer price inflation rose in June after three consecutive months of moderation due to a spike in vegetable prices halting a disinflationary trend underway in the economy, Reserve Bank of India (RBI) wrote in the July edition of RBI Bulletin.
Headline inflation
- Headline inflation measured by one year changes in the all-India consumer price index (CPI) edged up to 5.1% in June from 4.8% in May. The 28 basis points (bps) rise in inflation came from a positive momentum of 133 bps, which more than offset a favourable base effect of 106 bps, they wrote in the monthly State of the Economy article.
- “Food inflation (YoY) firmed up to 8.4% in June from 7.9% in May as the positive price momentum more than offset a favourable base effect,” the officials observed.
- In terms of sub-groups, inflation edged up in cereals, milk and products, fruits, sugar and prepared meals, while meat and fish, eggs, pulses and spices registered a moderation.
Deflation in LPG
- The RBI officials observed that core inflation remained unchanged at 3.1% in June, while vegetable prices continued to record double-digit rise YoY. Edible oils and fats recorded a lower rate of deflation. Fuel and light category deflation remained unchanged at -3.7% in June. While growth in kerosene and electricity prices moderated, deflation in LPG prices continued.
- Significantly, they observed that the belief that food price shocks are transitory is not borne out by the past year’s experience - too long a period for a shock to be called ‘transitory’. They said, superimposed on this ‘persistent’ component are sporadic spikes in a range of vegetable prices that overlap across constituents to give this category an enduring character.
Gains undermined
- “Food prices are clearly dominating the behaviour of headline inflation... undermining the gains of lowering core and fuel inflation through a combination of monetary policy and supply management,” the officials stated.
- “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,” they said.
- “The accumulation of food price pressures threatens the outlook for inflation in the form of spill-overs to wages, rents and expectations,” they added.