Food inflation eases on improved supplies

Food inflation eases on improved supplies

New Delhi: The annual food inflation eased in late September on improved supplies, which could soothe the central bank’s concerns high food prices could spill over to other parts of the economy.

Food prices are a political concern for the ruling Congress party, which faces key state elections this year and next. With a third of the world’s poor living in India, the country had seen governments being voted out over high food prices.

Data on Thursday showed the food price index in the year to 25 September rose 16.24%, compared with 16.44% in the previous week, as prices of wheat, pulses and cereals fell and as receding floods improved supplies.

Floods in northern India in late September affected more than three million people and ravaged more than 500,000 hectares of farmland.

The fuel price index for the same period rose 10.73%, similar to the previous week’s rise.

Food makes up 14% of the wholesale price index (WPI) while fuel contributes 15%, and a quickening in these components will put upward pressure on the headline figure.

Some analysts see a substantial easing of food prices after November, at the end of India’s festival season.

“I don’t expect food prices to come down substantially before the festival season, as there is too much of inflationary expectation due to the festival demand," said N R Bhanumurthy, an economist with New-Delhi based think-tank National Institute of Public Finance and Policy.

Headline inflation stood at 8.5% in August, above the Reserve Bank of India’s comfort zone of 5-6% and compared with the bank’s end-March projection of 6%.

Capacity constraints in the rapidly expanding economy are contributing to the sharp rise in prices, the International Monetary Fund said in its World Economic Outlook for 2010 released on Wednesday.

On Tuesday, a central bank deputy governor said “drastic" actions were needed to control inflation. The RBI, whose armoury of monetary tools cannot solve a supply-side problem, has earlier said emerging macroeconomic conditions, especially on prices, will determine future action.

The central bank has since March lifted its policy rate five times by a total of 125 basis points. Most analysts feel the bank is nearing the end of its tightening cycle and expect at most two quarter-point increases by end-March.