Spike in food prices may push CPI inflation further to 4.2-4.6%

CPI inflation steadily going up in the past two to three months, would have not caused so much pain, had it not been for the sharp increase in food prices.

The RBI had revised its CPI inflation target for the second half of the current fiscal to 4.2-4.6 per cent in the October policy, from 3.5-4.5 per cent earlier, citing an increase in crude oil prices and HRA increase under the Seventh Pay Commission, as key reasons. The RBI had more or less factored in a favourable movement in food prices.

However, the increase in CPI inflation from 3.28 per cent in September to 3.58 per cent in October, was led by an increase in food prices, mainly a sharp uptick in vegetable prices. Vegetable prices had plummeted the most between November 2016 and January 2017 and hence base effects could play truant too, leading to overall CPI inflation overshooting the RBI’s forecast.

The fall in CPI inflation since April 2016 until June this year was due to a sharp drop in food inflation. From a negative 1.17 per cent in June 2017 (lowest reading in CPI), food inflation rose to 2.26 per cent in October.

Interestingly, within food, cereals that have the highest weightage, have been more or less sticky over the past year. Milk that has the second highest weightage, has also been within the narrow range over the past year. In October, milk inflation moved up further.

So it was vegetables that have the third highest weightage within food that dragged food inflation low during the first half of this fiscal.

Tomato, onions to blame

A look at the retail prices put out by the Department of Consumer Affairs, reveals that it was the sharp fall in onion and tomato prices that led to vegetable inflation slipping into the negative territory until July. But since August, as prices of tomato and onion started to rise, vegetable inflation moved into the positive zone —shooting up to 7.47 per cent in October. In fact in October, tomato and onion prices doubled over the previous year.

Given that the sharpest fall in prices of these vegetables happened between November 2016 and January 2017, vegetable inflation could spike even further in the coming months, on account of base effect.

Pulse prices, however continue to see a sharp fall, though its weightage is much lower in the food basket.

Other upside risks

Core CPI inflation (excluding food and fuel), still remains elevated at 4.6 per cent. Housing inflation has moved up sharply from 6.1 per cent in September to 6.7 per cent in October. Rise in global crude prices led to fuel and light inflation moving up from 5.6 per cent in September to 6.4 per cent in October.

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