Continued vigilance on food prices must to tame headline inflation
The old debate of core versus headline inflation resurfaced when the Economic Survey 2023-24 asked the RBI to consider an inflation target excluding food, whose prices are influenced more by supply than demand. But RBI Governor Shaktikanta Das recently dismissed such a possibility.
The minutes of the recent monetary policy review meeting released Thursday confirm all members of the rate-setting panel are on the same page. Since July 2023, food inflation has remained significantly higher than the other two components of headline inflation, averaging 8 per cent and contributing 75 per cent to the headline number during April-June 2024.
Food price rise has fallen from its peak of 10.6 per cent in July 2023, but continues to be above 7-8 per cent. If you exclude this, the core inflation rate would collapse to a new low of 3.1 per cent in the current series. It means a progressive decline in food inflation is essential to achieve the 4 per cent headline inflation target.
Persistent food price shocks cannot be ignored given its high share in the household consumption basket. It also has a significant weight of over 46 per cent for computing retail inflation; so one cannot ignore its movements while evaluating the headline number. The risk of spillovers to non-food components also complicates the task of taming inflation. As committee member Rajiv Ranjan noted, any adjustment of the goalpost, apart from undermining central banks’ hard-earned credibility, may invite the wrath of markets and wipe out the work done so far.
That said, the wedge between headline and food inflation continues to widen, negating the gains made through the decline in core inflation. Importantly, higher food prices are spilling over to households’ inflation expectations and consumer confidence - which is why the RBI insists on maintaining the status quo.
As Deputy Governor Michael Patra observed, food price shocks may originate outside the realm of monetary policy and initially manifest themselves in supply mismatches, but when they affect components of inflation, they can propagate through second-order effects and get generalised - to which monetary policy cannot be insensitive.
Persistently rising prices are always and everywhere a reflection of too much demand chasing too little supply, even if it is a supply shortfall that starts the price spiral. As outgoing external committee member Ashima Goyal reasoned, continued vigilance is the price of success.