Inflation: Risks of global price rise

If risks to primary non-food and manufactured foods’ inflation continue, the moderating impact of abundant rainfall could be negated


Photo: Bloomberg
Photo: Bloomberg

Food prices drove July’s spikes in headline retail and wholesale inflation. However, most expect that a good rainfall will eventually contribute to lower food prices, resulting in lower inflation. This is the prevailing inflation narrative. However, July’s wholesale price inflation, which jumped 193 basis points over June to 3.55%, gives another twist—risks to primary non-food and manufactured foods’ inflation appear to be rising, reflecting global price movements in these products. If this behaviour sustains, price increase in these segments could overwhelm the moderating impact of abundant rainfall.

A basis point is one-hundredth of a percentage point.

July’s Wholesale Price Index (WPI) showed that the breadth of price rise is not restricted to the primary foods component alone and extends to non-food, primary articles and manufactured food products where prices rose sharply. 

Non-food primary articles inflation rose by 377 basis points to 9.5% (5.7% in June), the third successive monthly rise, outpacing the acceleration in primary foods inflation (11.8% versus 8.2% in June).

Manufactured foods, which capture prices of items such as processed foods, grain mill and bakery items, sugar and edible oils, showed a jump of 184 basis points in the inflation rate in a month—10.2% in July from June’s 8.35%. 

Both segments mirror global price movements, as the chart shows. 

Global indices like the Food and Agriculture Organization’s (FAO) food price index and the International Monetary Fund’s primary commodities (non-fuel) have steadily risen in the first half of 2016. World prices of sugar, oils and dairy products, which feature in both non-food and manufactured food categories, have increased sharply in recent months. 

Prices of non-food agriculture items like cotton and other fibres, oil-seeds of various hues, leathers and different minerals that also form the non-food component of the WPI are flaring up too. Manufactured food product price changes closely track world prices and there has been year-long consecutive increase since August 2015, in line with the FAO index movements. It remains to be seen if last month’s dip in the index (levels peaked in July 2015) sustains. But global food and non-food agricultural prices have risen consistently this year.

Domestic developments in these segments also indicate quick alignment with world prices ahead. 

For instance, Indian dairy producers expect to start exporting from the next quarter, according to reports. Short supply of groundnut has already driven groundnut oil prices to record highs; the upcoming festival demand will add to the price pressure. Prices of sugar, where output is down 7% in 2016-17, as per Indian Sugar Mills’ Association projections, flared up before export duties and stock limits were put in April, and are unlikely to remain immune to global price increases—world prices jumped more than 100% in the last two months alone. And cotton prices, which rose 34% in the last two months alone due to production shortfalls and higher exports in 2015-16, provide further impulse as large imports are projected to offset short supply. 

As the patterns until now suggest, it is hard for domestic prices to be immune to global price impulses. 

July’s non-food WPI and its behaviour in previous months is an indicator. Of course, even if prices of some or many products align to global ones, producers need to pass them on to the retail level to trigger policy-setting anxieties. But the process deserves careful watching. It is not certain that food inflation will necessarily cool with the monsoons even if it benefits prices of cereals and vegetables. 

Renu Kohli is a New Delhi-based economist. 

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