A surge foretold: On inflation data

Inflation could undermine broader consumption and economic growth

August 16, 2023 12:10 am | Updated 12:10 am IST

The latest NSO data, showing retail inflation accelerating to a 15-month high, comes less than a week after the Reserve Bank of India (RBI) left interest rates unchanged even as it warned of “a substantial increase in headline inflation” in the near term. The primary driver of this surge was the food price component, with the Consumer Food Price Index-based inflation accelerating by a mind-numbing 696 basis points to 11.51%, from June’s 4.55%. Save oils and fats, the 11 other items on the 12-member food and beverages group of the Consumer Price Index (CPI) logged year-on-year increases in prices. Cereals, the largest food component with an almost 10% weight in the CPI and representing the basic staples of rice and wheat, saw prices surge 13% from July 2022 levels, and posted a near doubling in the month-on-month pace to 1.2%. It was, however, vegetables, with a 6% contribution to the CPI, that witnessed a vertigo-inducing ascent in the inflation rate, with prices increasing 37.3% year-on-year, and 38.1% month-on-month in July. Data compiled by CMIE show the sequential surge in vegetable prices was the highest in at least five years, as tomato prices skyrocketed 214% from June’s levels. The all-India average retail price of the nutrient-rich food as on August 15, while 9% softer than a month earlier, was still at a punishingly elevated ₹107.87 a kilogram, well over three times last year’s Independence Day price of ₹31.66, data from the Consumer Affairs Department show.

Rather disconcertingly, the prices of 18 of the 19 items in the vegetables sub-group registered appreciable sequential price gains, with onions (19%), potato (11%), cauliflower (32%), brinjal (24%), ginger and garlic (almost 21% each) and potassium-rich green chillies (46%) making it very difficult for any family to manage its monthly food budget. Inflation in non-food items too were a palpable concern. The five other broad groups on the CPI, all recorded sequential price increases, signalling inflation is now more widely spread across the goods and services consumed in the economy than even in the preceding month. For all the central bank’s optimism that the price shock is likely to be temporary, allowing monetary policymakers the latitude to look through a couple of high headline inflation readings, the risk of inflation expectations getting unmoored in the face of such runaway price gains is far too real and in the present. With a looming El Niño and uneven monsoon rains adding to the uncertainty over the supply of agricultural produce in the coming months, the RBI may find itself facing an uphill task in aligning inflation to its avowed target of 4% unless all authorities act in concert to tame inflation before it undermines broader consumption and economic growth.

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