The odd combination of high food price inflation and low core inflation creates several dilemmas for RBI
The inflation situation now resembles what India experienced in early 2010, when accelerating food prices combined with rapidly falling core inflation.
The September price data released on Monday showed that food prices have been rapidly rising since May. Food inflation is now at its highest level since July 2010. The main reason: vegetable prices, which may have shot up because heavy rains have hurt production as well as dislocated supply chains. Meanwhile, core, or non-food, non-fuel manufacturing inflation, has been falling because weak demand has hurt the pricing power of companies.
This odd combination of high food price inflation and low core inflation creates several dilemmas for the Reserve Bank of India. Which inflation measure should it focus on? A central bank does not have any control over food prices, but more costly food will push up inflationary expectations. So it is a very complicated situation right now.
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