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How vegetables became inflation villain yet again
- Vegetables alone dragged up retail inflation by over 200 basis points
Vegetables’ contribution to retail inflation surged to a 42-month high in July while that of tomatoes rose to a 65-month high, unexpectedly taking the headline figure beyond the 7% mark for the first time in nearly a year, a Mint analysis showed.
One-third (32%) of the total year-on-year (y-o-y) shift in the Consumer Price Index (CPI) in July came from the sharp rise in vegetable prices alone, with more than half of this coming from tomatoes, posing a dilemma for the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) that has held rates steady since April.
On a y-o-y basis, overall retail prices rose 7.4%, vegetable prices rose 37%, and tomato prices tripled last month, data released on Monday showed. However, all items have different weights in the retail inflation basket based on their consumption levels. Hence, an item’s contribution to inflation becomes a more useful way to assess its impact in lifting overall household budgets relative to other items.
In an ideal scenario, an item would contribute just as much to changes in CPI as its weight in it. Vegetables have a 6% weight in the CPI basket, and tomatoes, a sub-item under vegetables, 0.57%.
This effectively means that if vegetables were not part of CPI, inflation would be just 5.4%, not 7.4% as it turned out. In other words, vegetables alone dragged up retail inflation by over 200 basis points (bps). For eight straight months until June, vegetable prices had been a downward force on overall inflation. Tomatoes have been a major cause of the change in trend due to a massive shortage and surge in prices.
This was only the seventh time since 2012 that vegetables pushed retail inflation upwards by 200bps or more. The highest vegetable-led jumps in the current inflation series were 388bps in November 2013 and 329bps in December 2019.
Within vegetables, potatoes, onions and tomatoes are particularly important due to their usage in daily food items but also due to the volatility they bring to headline inflation. Mid-2018 was defined by high potato inflation, December 2019 and January 2020 were marked by high onion prices, and July 2023 became the month of high tomato inflation.
At its peak, the addition of 213bps in December 2019 by onion with a weight of 0.64% had become a cause of concern. The story is similar to tomatoes this year. Out of the three vegetables, tomatoes are more sensitive to prices, having an outsized contribution to inflation—that is, contribution more than its weight—in 52 out of 97 months with comparable data, the most often among the three key vegetables. While the dramatic rise in tomato prices may keep the MPC on its toes, it may not change its perspective materially.
“RBI’s own research depicts that seasonal increases in episodes of high tomato prices tend to be short-lived—the average duration of a high price episode is 2.6 fortnights, and prices do not ratchet up across these seasonal spells,” said Madhavi Arora, lead economist at Emkay Global Financial Services.
Economists see vegetable prices easing by October-December, but before that, another 7%-plus print is expected in August. It is often debated whether MPC should look through these spikes and lows, often caused by the seasonal nature of vegetable prices, while setting monetary policy.
MPC, in its policy announcement on 10 August, said it was “important to be vigilant about these shocks with a readiness to act appropriately so as to ensure that their effects on the general level of prices do not persist”.
The 7.4% inflation print released Monday shocked economists, who had anticipated a rise but not to this extent. A Mint poll of 19 economists had predicted the figure at 6.5%.
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Business NewsEconomyHow vegetables became inflation villain yet again
First Published:16 Aug 2023, 12:33 AM IST
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