Food inflation declines to 0.42%

At five-and-a-half-year low, heads for deflation.

Food inflation appears set to give way to deflation. It fell to a five-and-a-half-year low of 0.42 per cent for the week ended December 17 and raised hopes of overall inflation falling below nine per cent in December, the first time in over a year.

Food inflation is the lowest since at least April 2006, according to the earliest data available with Bloomberg. It prompted Finance Minister Pranab Mukherjee to hope for six per cent overall inflation by March-end. "If this trend continues then you will have (fiscal) year-end (headline) inflation around six per cent... But, it cannot be lower than six per cent because inflationary pressure was higher in the weeks before,” he told reporters.

Falling inflation may give the RBI room for growth-boosting measures in its policy review next month. Food inflation fell by 1.39 percentage points from 1.81 per cent in the previous week, partly because of a high base effect of 15.48 per cent in the corresponding period last year. The wholesale food price index also fell on a week-on-week basis. The index declined to 190.3 points during the week ended December 17 from 191 points the week earlier. It has been declining consistently every week since October 22, when the index stood at 202 points.(Click here for PRICE CHART)

Protein-based items such as non-vegetarian food and milk saw a rise in inflation during the week. Inflation in pulses saw the rate of price rise falling moderately. However, it was still high at 14.07 per cent.

Rice, wheat and fruits witnessed a decline in the rate of price rise. Onions and tomatoes continued to see inflation in the negative zone. Potatoes were similar, though the pace of the fall abated a bit. The fall in food inflation is significant, as it was as high as 12.21 per cent just two months back. It started declining from the week ended October 22.

“We have never seen such a sharp decline in a short span of time in recent history,” said, Arun Singh, senior economist, Dun and Bradstreet. He did not rule out the possibility of deflation in the coming weeks, which could however be temporary. “It may be sub-zero for some time but will start rising again,” pointed Singh.

Siddharth Shankar, director, KASSA, said food Inflation would remain subdued for the next two-three months and once a high base effect would no longer be there, there would be a sharp rebound in inflation numbers.

“I have lowered my overall inflation estimate for December from 8.5 per cent to not over eight per cent for December,” said Singh.

Primary articles (those in raw form) have shown a significant fall in inflation, falling to 2.70 per cent during the week in question from 3.78 per cent the previous week. The number stood at 9.08 per cent for the week ended November 12.

“Primary articles have a lag effect of two-six months on the manufacturing sector. This effect will show in the January-March number of inflation for manufactured products,” he added.