Alarm bells as high food prices drive inflation
Contrary to expectations, retail inflation for July this year has shot up to a 15-month high of 7.44%, up from 4.87% in June. In recent weeks, economists expressed confidence that runaway inflation had been tamed after it had dipped to 4.7% in April this year and 4.25% in May. The year-on-year jump in the Consumer Price Index (CPI)-based inflation was all the more alarming as it had spiked well above the poll-based forecasts conducted by Reuters (6.4%) and Bloomberg, which had predicted inflation at 6.5%. RBI’s recent guarded confidence that things were under control has also been left in tatters, with inflation shooting far beyond the Reserve Bank’s tolerance level of 6%.
It appears the analysts had not considered the high food inflation that has persisted for some time. According to the National Statistical Office (NSO), the food inflation rate rose sharply to 11.51% in July from 4.49% in the previous month, driven by the high prices of vegetables and tomatoes (37%), pulses (13.3%) and cereals (13%). The continuing high food inflation is a matter of concern as it is not easy to reverse shortages and high prices in a limited timeline, given the erratic monsoon and the low acreage of sowing, especially in the case of pulses. Reports that there is deficient monsoon in most parts of the country is again a matter of concern as it may result in a further short supply of food items.
The recently held Monetary Policy Committee meeting of the RBI had kept the repo rate (the rate of interest at which the RBI lends money to commercial banks) unchanged on the confidence that food inflation was high but on the way down. This was based on what was seen as a successful government intervention to cool down food prices and push up the availability of onions and tomatoes. Therefore, the RBI was not for lowering lending rates out of caution; it was also expected not to increase them over the next two to three quarters. The spike in retail inflation has now torn up some of these assumptions. Given the new scenario, it will be a regime of tight and more expensive credit for some time, slowing growth in the medium term. On the other hand, the government will have to work harder to cool food prices by ensuring higher production and preventing man-made shortages.