Home / Economy / Why we need less food in our inflation basket

What does the latest CPI data show?

After declining for three consecutive months, retail inflation rose in August to 7% from 6.71% in July. While the rise in headline inflation is small, inflation in food and beverage was a much higher 7.57%. The rise was mainly driven by cereals and products, whose inflation rose to a 103-month high of 9.57%, while inflation for vegetables and spices remained in double digits. In contrast, core inflation inched up only 6 basis points to 6.01%, which may not offer much relief, as the Reserve Bank of India’s rate-setting panel is mandated to take headline inflation into account for its monetary policy decisions.

Why has food inflation become a worry?

While food prices tend to see seasonal spikes and crashes in a 12-month cycle, this year, prices have remained elevated, due to rising global food prices, erratic rains, and second-round effect of high transportation charges due to costly fuel. The contribution of food and  beverage  items to headline inflation, which was just 17-19% in  September-October 2021, is now around 50%. In five of the past six months, the group has contributed to overall inflation more  than  its  weight of  45.86%. Since the food and beverage group dominates the inflation basket, its influence on the headline figure is more pronounced.

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How does it affect monetary policy?

With about half of the price index susceptible to seasonal factors and government policies, inflation targeting is inherently cumbersome. Volatile food prices affect the overall predictability of inflation, limiting RBI’s policy choices. So, if food items were to have a lower share in the consumption basket, predictability and efficacy of monetary policy could improve.

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Will a revision in the CPI basket help?

Definitely yes, as an update would most likely lower the weight for food items. Historically, as the income levels have improved, the share of food in consumption expenditure has declined. The latest series for CPI for Industrial Workers, which was released in October 2020, saw a downward revision of 7 percentage points in the weight of food and beverages. Unfortunately, a new CPI series is unlikely before FY25 as the results of a new Consumer Expenditure Survey currently underway are unlikely for a couple of years.

Will food inflation worries end soon?

Since food prices are generally volatile, it is difficult to predict their direction. One of the lead indicators–sowing–suggests lower crop output this year. Kharif acreage is currently 1% lower than last year, with rice sowing down 5%. However, the government has imposed curbs on rice export, which could offset supply short-ages and check prices. While lower global edible oil prices could ease pressure, milk price hikes will add to food inflation. With RBI’s hands tied on this front, the government may have to intervene further.

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