Persistent Food Inflation – A Key Indicator to watch out for!

What’s the Point?

In the Monetary Policy Review held in August 2024, the Governor of Reserve Bank of India (RBI), Shaktikanta Das stated, “Headline inflation, after remaining steady at 4.8% during April and May 2024, increased to 5.1% in June 2024, primarily driven by the food component, which remains stubborn.” While food inflation decreased to a 13-month low of 5.42% in July 2024 due to a high base effect, the food basket could continue to exert price pressure, particularly vegetables. Food inflation, with a weight of ~46% in the CPI basket, contributed to more than 75% of headline inflation in May and June 2024. In that light, a persistent food inflation signals to RBI to remain watchful in the near term.

Numbers in Perspective

Source: Centre for Monitoring Indian Economy (CMIE), *For June 2024

Reasons that have led to the rise in Food Prices

2023 was characterised as an El Niño year, which is associated with weakening monsoon winds and dry weather in India. During that year, the monsoon was not only the weakest in 5 years, but was also marked by uneven distribution of rains across 4 months. As per the Economic Survey FY2024, such unfavourable weather conditions significantly impacted the production of vegetables and pulses (a few key examples highlighted below), which has led food inflation to be over 8% for 10 out of the last 12 months (excluding July 2024) – 8 consecutive months since November 2023.

• The increase in tomato prices in July 2023 was caused by seasonal changes in crop production, region-specific crop diseases such as white fly infestation, early arrival of monsoon rains in the northern part of the country, and logistical disruptions in isolated areas due to heavy rains.
• The spike in onion prices was due to several factors, including arrival of monsoon rains during the last harvesting season affecting the quality of rabi onions, delays in sowing during the kharif season, prolonged dry spells impacting kharif production, and trade-related measures taken by other countries.
• The prices of pulses, particularly of tur, increased due to low production over the past two years, caused by adverse weather conditions. Urad production was affected by slow sowing progress in the rabi season coupled with climatic disturbances in the southern states. The area and output of gram was also lower compared to the previous rabi season.

Implication and Current Situation of Rising Food CPI

High food inflation adversely affects household inflation expectations. As per RBI’s Consumer Confidence Survey (August 2024), the net response on price level by households for July 2024 indicate that a higher percentage of the respondents perceive that the price levels have risen in the past 1 year (vs July 2023), and expect the same to rise over the following year (Please refer to the table for better understanding).

Source: RBI

Despite a weak and delayed start, the onset of La Niña (HDFC Mutual Fund's Tuesday's Talking Point - El Niño to La Niña - Another Positive for Indian Economy!) has led cumulative southwest monsoon rainfall to pick up – standing ~7% above average so far, in line with the Indian Metrological Department's forecast. Further to that, the spatial spread has improved, supporting the kharif sowing (Total area sown (August 2, 2024): 2.9% higher than a year ago). Assuming a normal monsoon, an above-normal buffer stock of food grains and global easing of food prices could help in keeping the food inflation in check, and help RBI achieve the target FY2024-25 CPI inflation of 4.5%.

Conclusion

In its Monetary Policy Review (August 2024), RBI highlighted that a persistently high food inflation and unanchored inflation expectations could be a key risk, as it could lead to spillovers to core inflation through pick-up in wages on cost-of-living considerations. In that light, while some of the global central banks have started cutting interest rates, RBI has been more vigilant of not carrying out any premature rate cuts.

To ensure healthy supply of food grains and food security, the Government has designed a diverse array of food security programs that are helping combat hunger and malnutrition across different demographic segments. Some of these initiatives include national schemes and local efforts targeting vulnerable populations such as low-income families, children, and the elderly. The Government has also taken efforts in the recent past to promote millets in order to better diversify the overall food basket. As of July 2024, the Central Pool holds 608.75 lakh metric tonnes of food grains, significantly surpassing the stocking norm of 411.20 lakh metric tonnes (Source: Press Information Bureau (PIB)). With the current year witnessing a good rainfall pattern, and India being a food surplus country today (Source: PIB) the prevalence of food insecurity has reduced from 24.7% in 2022 to 18.8% in 2023, which is expected to reduce to just 0.7% by 2033 (Source: International Food Security Assessment (IFSA), 2023–2033).

All these prudent measures are expected to prevent overall inflation from becoming sticky, even after food inflation recedes. More importantly, a controlled food inflation could raise the expectations of interest rate cuts in H2FY25.

Sources: RBI, CMIE, PIB, IFSA, and other publicly available information.

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