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During the nationwide lockdown following the covid outbreak, food inflation had soared to 11.7% and 9.2% in April and May 2020, respectively. During the second wave this year, the surge in food prices has been far modest.

A key contribution towards this rise in inflation was mark-ups on food prices at the retail level. Mark-ups are the margins added to the cost of food items by the retailer to make profit.

A Reserve Bank of India (RBI) study shows that the mark-ups in food inflation increased by 7% during the stringent nationwide lockdown last year. More importantly, the mark-ups persisted even as restrictions gradually began to ease. Food inflation was above 9% in the months that followed the relaxation of the lockdown June 2020 onwards.

A retail problem
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A retail problem

During the nationwide lockdown following the covid outbreak, food inflation had soared to 11.7% and 9.2% in April and May 2020, respectively. During the second wave this year, the surge in food prices has been far modest.

A key contribution towards this rise in inflation was mark-ups on food prices at the retail level. Mark-ups are the margins added to the cost of food items by the retailer to make profit.

A Reserve Bank of India (RBI) study shows that the mark-ups in food inflation increased by 7% during the stringent nationwide lockdown last year. More importantly, the mark-ups persisted even as restrictions gradually began to ease. Food inflation was above 9% in the months that followed the relaxation of the lockdown June 2020 onwards.

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“With food constituting almost half of the CPI (consumer price index) basket, the extent and persistence of these retail price margins have significant implications not only for the food inflation trajectory but also for the headline inflation path, which underscores the need to understand the role of the lockdown and mobility on retail margins across centres and commodities," the RBI said in its monthly bulletin.

So, what do the mark-ups say about inflation in general?

The study shows that margins had an inverse relationship to mobility. Last year’s nationwide lockdown had severely curtailed mobility, leading to persistent high margins at the retail level. During the second wave, restrictions have been moderate, facilitating an ease in margins eventually. Supply disruptions have been the key driver in food inflation flare-up, both during the first and second waves. Better supply management by the government has resulted in containing a rise in mark-ups during the second wave. The monetary policy’s premise that inflation has largely been a supply-side problem bears out. This augurs well for food inflation, going ahead. Perhaps this is also one reason why food inflation has not been a big worry among policymakers. Beyond the expected cyclical increases and the concerns surrounding the spread of monsoon, policymakers do not see a spike in food prices.

Ease in supply disruptions and better management by the government may mean that price pressures may remain modest even if there was another wave.

That said, there is another element here—inflation expectations. The RBI study does not mention expectations as an element. Supply disruptions tend to lift inflation expectations through scarcity. This feeds into margins as well. While easing supply disruptions bring down margins, the expectations channel may take a while to soften. Also, historically persistent food inflation has meant that expectations remain elevated.

The test for the RBI is to navigate expectations until the ease in inflation, mainly in food, begins to percolate into inflationary expectations.

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