Food CPI: muted relief!

He promised, and delivered! Food inflation finally slowed in December 2022. Never mind the naysayers, as the numbers speak for themselves. The parts he wouldn’t mention, however, are: it was long overdue; and, that it wouldn’t last.

A seasonal slowdown in the food sub-index of CPI during December is a well-recorded phenomenon. And sure enough, it has slipped after climbing for 10 months straight. But it is also the slowest decline for December in the past four years, barely turning red at -0.14 percent, month-on-months. For context, food inflation declined by an average of -2.54 percent for the last four December (2018 to 2021). In the past, the seasonal Food CPI decline in December used to be sufficient to bring the general inflation – National CPI – into negative territory. For the first time in as many years, month-on-month inflation continued to march forward in December, rising by 0.50 percent on a national basis.

Yet, the slowdown in the general inflation run rate is still mostly a gift from the food basket. Were it not for the negative 83bps impact from the perishable subindex, national CPI would have been highest for the Sep-Dec quarter. The perishable subindex is down on the back of the seasonal decline in prices of potatoes and tomatoes, even though prices of the heavyweight onions have shown no respite. Reportedly, onion supplies are still stuck at port due to foreign exchange shortage and may finally slow down if there is some relief on that front during January 2023.

This brings us to the second part: how it never lasts. Outside of peak winter months (December and January), the perishable subindex during the remainder of the year is on average 15 to 20 percent higher over the preceding December. In fact, for the last four years, the perishable subindex jumps forward by at minimum 25 percent by June every year. The dip may be a constant, but prices rarely fall below the preceding year’s bottom.

But more significantly, the slowdown in perishable prices was not accompanied by a similar movement in the non-perishable index. The non-perishable index (which consists of cereals, proteins, fats, etc) rose by 2.37 percent month-on-month during December, a substantially high jump in a year that was already marked with record highs; month-on-month change for the preceding 11 months (average) stood at 2.38 percent. Compare this to the average month-on-month change in the non-perishable index for the last four December, which stood at -0.1 percent.

And with the scrouge of flour price spiral rearing its head again, it won’t be long before food CPI gets out of hand again, pushing monthly national CPI rises above 2 percent (MoM) by as early as February 2023. CY22 may be over, but the worst for food prices is almost certainly not!