Food inflation may engulf other sectors

RBI says food supply constraints to taper off only over time.

Concerned over rising food prices snowballing into broad-based inflation, the Reserve Bank of India (RBI) today said it might generate a wage-price spiral and raise inflationary expectations.

“From the standpoint of monetary policy, the possibility of food price inflation spilling over to other groups in the Wholesale Price Index, through expectations-driven price revisions to cause a generalised inflation, remains a major concern,” RBI said in its macroeconomic and monetary development report.

On a year-on-year basis, the Wholesale Price Index (WPI)-based headline inflation in December 2009 was 7.3 per cent, whereas WPI inflation, excluding food articles, was 2.1 per cent, which suggests the concentrated nature of inflation so far.

Dwelling on the factors that could push inflation further, RBI said supply constraints would taper off only over time in the case of food articles, given the normal crop cycle. Rising international food prices suggest there are limited options to resort to imports to improve supplies.

The return of pricing power with stronger recovery and scope for wage-price revisions were linked to high Consumer Price Index (CPI) inflation, RBI said.

Private demand would rebound as uncertainty recedes and people feel more confident, according to the report.

Inflation based on year-on-year variations in CPI has continued to increase during 2009-10 so far, mainly due to increase in the prices of food, fuel and services. The various indices of price inflation remained high in the range of 13.5-17.2 per cent during November-December 2009 compared with 10.4-11.1 per cent in November 2008 and 8-9.7 per cent in March 2009.

The central bank said the rebound in global commodity prices, particularly in oil and metals, with stronger recovery in emerging and advanced economies could also push inflation up. Further, the asset price increases with higher capital inflows, and early indications of a generalised inflation, might fuel inflationary expectations.

While the central bank has expressed grave concern on price inflation, this does not mean that there is only adverse story on the price front. It said that there were some factors which could moderate the price pressure.

The arrival of post-harvest crops in the last quarter of 2009-10, particularly certain vegetables, additional release of rice and wheat from the buffer stock and better distribution would ease the part of burden.

Absence of further increases in minimum support prices and higher rabi production would partly offset the impact of weak kharif, it added.