Comment | Global food prices staying up is a risk to RBI’s benign inflation outlook

Ravi Ananthanarayanan

If the RBI's monetary policy committee had met after February 7, their view on global food inflation may have been slightly different. Global food inflation began 2019 with a spring in its step that had gone missing since September.

The Food and Agriculture Organisation's Food Price Index for January rose by 1.8 percent over December, taking the index back to a level last seen in September. However, it is still lower by 2.2 percent from a year ago.

The increase was led by a sharp 7.2 percent increase in dairy products, with skimmed milk powder prices increasing further. Strong demand in Europe and seasonal tightening in supply were main reasons. Vegetable oils was another basket that rose sharply, due to tight palm oil supply and firm import demand, according to FAO.

Even sugar prices rose, but this was chiefly due to a stronger Brazilian real making exports less attractive. Higher crude oil prices lent support to sugar (as producers switch to making more ethanol). In cereals, except for rice, prices remained firm, which the FAO attributed to decline in output in 2018, tighter export supplies and good world demand.

Domestic food prices don‘t track global ones closely, especially in cereals. But a sustained uptrend can affect prices, especially for traded products such as sugar, oils and milk powder. That could mean better realisations for producers but not for policy-makers. Since the RBI has made a big deal of food inflation remaining benign, as one of the factors that allow it to lower its inflation forecasts, a sustained uptrend in food inflation is a risk to that assumption.