Food inflation: past its peak

The headline inflation seems to be creeping up again. And if there is one obvious culprit – beyond the phenomenal revision in piped gas tariffs – it is probably the food basket. With its 34.6 percent weightage in national CPI, food inflation rose by 28 percent during November 2023, led primarily by the perishable components. Perishable prices rose by 6.2 percent on a month-on-month basis, following a 13 percent rise from the previous month.

But that’s good news. On year-on-year basis, rise in perishable sub-index is just 9.62 percent, the only CPI component to with annual inflation rate within single digits. For those uninitiated, the muted rise in perishable inflation on annual basis is an outcome of the crop damage due to unprecedented monsoon floods of 2022, which led to hyperinflation in price levels of fruits and vegetables between Sep – Jan last year, further compounded by the restrictions on imports. The spiral in food prices of perishables such as onions, tomatoes, ginger, garlic etc soon died down after fresh crop harvest and imported supply begin to trickle into the market, bringing down average prices for Q2 and Q3 of CY23.

Which means that the impact on year-on-year headline inflation from perishables in coming months will be significant, once the seasonal slowdown in prices of various fruits and vegetables begins to kick in during December and January. Food inflation is past its peak, and the contribution from perishables sub-index will appear particularly prominent in the near term.

A slowdown in general price level primarily due to perishables, however, does not inspire a lot of confidence, as history shows that the stability in prices of perishables is short-lived. Over a 6 to 12 month period, prices of perishables historically point upward, with disproportionate upswings than downswings.

Luckily, the slowdown in food inflation in recent months is not only broad-based, but also probably now safe to conclude that food inflation in both urban and rural markets is now past its peak. This slowdown has coincided with the administrative clampdown on smuggling and currency exchanges - and peaking of discount rate, but it is hard to fathom that the correlation alone accounts for causation.

Remember that national inflation averaged above 31 percent over the past 12 months, while food inflation averaged above 42 percent during the same period. It bears emphasis that the contribution (or impact in points) of the food index in national headline inflation has averaged at 50 percent for the last 12 – 18 months, effectively meaning that at least half of the inflation stemmed from rise in food prices alone. To insist that much if not all of this inflation was an outcome of smuggling or governance failure may make for a sexy headline but also reflects lack of technical rigor in research.

In a market where it is routinely insisted that much of increase in food prices is cost push and an outcome of distortion in supply chain; in an economy where it is often concluded that much of the food and agri- value chain is out of the formal banking credit net, it is extremely curious that food prices have gained much wanted stability soon after market interest rates peaked. Does that mean an effective monetary transmission exists and the food prices were in some way elevated due to negative real rates? Or, how or why can food and agri-produce prices be so heavily be influenced by currency market stability when the quantum of external trade across food commodities is very low, and in many cases altogether non-existent.

Now that food inflation is past its peak, these questions demand serious, dispassionate, and thorough economic research, bearing in mind the over-indexed weightage of food basket in national CPI. Only if the policymakers are truly committed to avoiding such a devastating cycle inflationary cycle – and the disastrous erosion of purchasing power for the millions below poverty line – again in future.