The June inflation data shows that prices of food and manufactured products continue to go along divergent paths. Since February, food inflation has accelerated while price pressures on manufactured goods have eased.

India has battled with this paradox for a long time now. One of the sharpest illustrations was in July 2009, when inflation of manufactured goods was in negative territory (-0.25%) while food inflation was in double digits (12.74%). That was at a time when the economy was battered by the after-effects of the global financial crisis of September 2008, which had a disinflationary impact on many parts of the Indian economy while food prices continued to gallop thanks to a weak monsoon.

Data over the longer term also shows how the price trajectories in the two sectors of the economy have been quite different from one another. Average food inflation since April 2009 has been 12.63%. Average inflation in manufactured goods has been 5.06%.

With weak industrial growth and the threat of low farm output because of a weak monsoon, India could be going back to the mix it saw three years ago in the middle of 2009.

Such a twin-track inflation problem creates complicated policy dilemmas. The Reserve Bank of India tracks core inflation—which excludes volatile food and fuel prices—very closely. It has been receding, mainly because the Indian economy is now growing below its potential. The trend in core inflation strengthens the case for lower interest rates.

However, central banks have to also keep a close watch on inflation expectations of households since they affect wage demands in an economy. Food prices affect inflation expectations in India because food accounts for a very large part of households budgets. So, food prices cannot be ignored when interest rate policies are framed.

The latest inflation data released on Monday shows that this dilemma could become sharper in the months ahead.

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