CEA expects food inflation to ease with unlock and good monsoon

Moreover, the Chief Economic Adviser (CEA) asserted that high food inflation has not impacted a large section of population as they are being given free ration under the PMGKY

Attributing the rise in food prices to restrictions imposed by several states during April-May to deal with the second wave of Covid-19, Chief Economic Adviser K V Subramanian said food inflation is likely to moderate on account of the twin impact of opening up of economic activities and good monsoon.

Moreover, the Chief Economic Adviser (CEA) asserted that high food inflation has not impacted a large section of population as they are being given free ration under the Pradhan Mantri Garib Kalyan Yojana.

"Some of the increase in food inflation in the recent print has been because of the restrictions that have been placed...we even saw last year when the lockdown happened and the supply side was affected, impacting food inflation, which in turn then led to an impact on CPI inflation.

"So I think that's a contributing factor and given that now a lot of the restrictions are getting eased, I do expect that food inflation should moderate," he told PTI in an interview.

The retail inflation for May breached RBI's upper tolerance limit of 6 per cent, putting pressure on both the central bank and government to cool down food prices.

Earlier this month, the government reduced the tariff value for import of edible oil, including palm oil, by up to USD 112 per tonne.

Besides easing of restrictions, Subramanian said, a good monsoon will also have a benign impact on food prices.

Talking about the effect of rising petrol and diesel prices on retail inflation, Subramanian said it will not be significant as the weightage of fuel and light category in the Consumer Price Index (CPI)-based inflation is just 7.94 per cent.

"As I said, the overall weight is not high, but if you take into account the contribution of the petrol and diesel and especially diesel to transportation costs, and thereby the impact on food inflation to transportation and other items are very very similar to first order impact," he said.

He added that an analysis done by the Reserve Bank of India (RBI) suggests that the first order and second order effects of fuel price rise are almost similar in magnitude.

The first order impact refers to the direct impact of rising fuel prices on the price index, while second order impact indicates the cascading effect on other items, leading to price escalation.

Rising prices of edible oils and protein rich items pushed the retail inflation to a six-month high of 6.3 per cent in May.

The government has asked the Reserve Bank to keep the retail inflation at 4 per cent with a margin of 2 per cent on either side.

CPI inflation has breached the upper band of the inflation target about 10 times since the first meeting of the Monetary Policy Committee (MPC), which decides the key interest rate, in October 2016.

Wholesale price-based inflation too accelerated to a record 12.94 per cent in May on account of rising prices of crude oil, manufactured goods and the low base of last year due to the COVID-19 lockdown.

While the CPI-based inflation rose from 4.23 per cent in April to a six-month high of 6.3 per cent, food inflation soared from 1.96 per cent to 5.01 per cent in May. The previous high in retail inflation was 6.93 per cent in November 2020.

As per the data on CPI, factored in by the RBI while arriving at its monetary policy, the steepest price rise was witnessed in the 'oils and fat' segment, which on an annual basis showed an increase of 30.84 per cent.

The May CPI data released by the National Statistical Office (NSO) further revealed that the rate of price rise in 'meat and fish', 'egg', 'fruits', and 'pulses and products' stood at 9.03 per cent, 15.16 per cent, 11.98 per cent, and 9.39 per cent, respectively.

The rate of price rise in the 'fuel and light' category quickened to 11.58 per cent.