Reassurances on inflation

Food inflation's reaction to bad monsoon is muted

The Consumer Price Index (CPI) numbers for July, which were published on Tuesday, raised some concerns. The year-on-year rate of inflation rose by about half a percentage point from June, coming in just a shade below eight per cent. This was, of course, largely attributable to the spike in the prices of several vegetables - but putting this aside for the moment, the surprise with the July numbers was not why inflation had increased, but why it had not accelerated more sharply. With fears of a severely deficient monsoon quite visible during the month, expectations of shortfalls in production could have driven prices of many food products much higher. In fact, even as vegetable prices showed an increase of about 17 per cent in July, the overall rate of food inflation was contained by a sharp deceleration in the rate of increase in rice prices. After several months of double-digit increases, this came down to below seven per cent. On the negative side of the CPI picture, the core inflation (excluding food and energy) remained stubborn at above seven per cent - certainly an improvement over a year ago, but still very much outside the Reserve Bank of India (RBI)'s comfort zone.

Turning to the Wholesale Price Index (WPI), the July numbers for which were published on Thursday, the picture is somewhat more comfortable. The year-on-year rate of increase has fallen to 5.2 per cent, the lowest rate since February 2014. Food inflation was above eight per cent - not the lowest in the past six months, but certainly a relief considering the monsoon situation. Manufactured goods inflation, as has been the case over the past several months, was a little over three per cent. The rate of inflation in fuel and power is indeed at its lowest in six months, having fallen below eight per cent.

Two significant implications emerge from these patterns, both rather reassuring. First, even though rainfall has been significantly below normal, the impact on the prices of food items has been muted. This does not guarantee that prices will not rise when the true extent of the supply situation is known in a couple of months. But, for the moment, the worst fears of a monsoon-related surge in food prices have clearly proved to be unwarranted. An important reason for this is the government's announcement of its intention to sell cereals in the open market from its bulging stocks. The impact of this is immediately visible in the dynamics of rice prices. More active use of stocks to dampen price volatility is something that many analysts have advocated, and their recommendations seem to have been vindicated in this instance. Even a mere announcement appears to have a positive impact. Second, even as the West Asian region continues to be in a state of turbulence and uncertainty, crude oil prices have, against conventional wisdom, softened appreciably. This has caused the second big threat to inflation to recede. In a sense, with respect to these two major risk factors, a relatively positive scenario has materialised. While consumer inflation is still too high for the RBI to decide to change its policy stance, the receding of these two risks does increase the prospect of the favourable inflation trajectory persisting over the next few months.