Having stubbornly remained in double digits for the past four months, food inflation slumped beyond expectations to 8.60 per cent for the week ended November 20 from 10.15 per cent in the previous week, ostensibly owing to further easing of prices following increased kharif crop arrivals.
Even as a gradual decline in the Wholesale Price Index (WPI) food inflation was expected, having eased for seven weeks in a row but still holding the double-digit level, the sharp fall to its 18-month low, which was witnessed way back in May last year, came as a surprise to economic analysts.
The last time food inflation was in single digit this calendar year was during the week ended July 24 at 9.53 per cent.
The fall in food inflation numbers to single digit is something that the government had been hoping for. Commenting on the latest data, Finance Minister Pranab Mukherjee said: “Decrease in food inflation is good...I hope it will come down further.” Incidentally, Chief Economic Advisor Kaushik Basu had projected earlier this week that the food price spiral would fall to single digit and even go beyond [below] 9 per cent for the week ended November 20.
The sharp fall in food inflation has also raised hopes that if the downward trend is sustained, it would help in bringing down headline inflation to the projected level of 5.5 per cent by the end of the current fiscal. “The overall inflation will remain the same as what I think we had said and what the RBI has said...which is about 5.5 per cent by March 2011...Food inflation is definitely on its way to come down,” Finance Secretary Ashok Chawla said.
A close scrutiny of the WPI food inflation data, however, presents a mixed trend. On a year-on-year basis, while pulses turned cheaper by 10 per cent, wheat by 3.16 per cent and vegetables by 3 per cent owing to a slump in potato prices by nearly 43 per cent, onions were dearer 16.86 per cent. Besides, the prices of the protein-rich food items such as eggs, meat and fish were higher by about 15.58 per cent. Fruits and milk prices were also up 19.27 per cent and 17.76 per cent, respectively, on an annual basis.
Analysing the WPI data, KASSA Director Siddharth Shankar said: “The decline in the food inflation numbers is in line as what had been projected but the sudden decline that we have seen is more due to base effect. Looking at a six-month horizon, I see food inflation falling further with prices of pulses, grains and vegetables continuing to decline but I do not see a fall in prices of items like egg, meat, milk and fish.”
As for its impact on overall inflation, Mr. Shankar said he did not expect that to show a sharp decline in the coming months.
“The hot money in the system will keep the overall inflation numbers on the higher side and the RBI may need to take some measures to control the flow of hot money into the system. The central bank will have to tread a very thin line of controlling money supply in view of the fact that some of the western economies have still not picked up,” he said.