Households across the country were scarred by soaring prices of certain vegetables such as tomatoes and onions, staple items in many dishes, through November. Edible oil prices were also elevated as were that of pulses such as arhar and masur.
Yet, the consumer food prices index (CFPI) for the month rose just 1.9 percent compared with the corresponding month of 2020. On a month-on-month basis, CFPI climbed 1.3 percent, at half the pace at which it climbed in October.
The headline consumer price index (CPI) for the month was at 4.9 percent, from a year ago. Although it had climbed to a three-month high, it is well within the Reserve Bank of India’s tolerance band of 2-6 percent.
Significantly, the central bank had raised its forecast for CPI for the third quarter of the current fiscal year to 5.1 percent at the December meeting of the Monetary Policy Committee, acknowledging the persistence of high core inflation. Previously at its October meeting, the committee had estimated CPI for the third quarter at 4.5 percent.
The wholesale price index or WPI, another commonly tracked measure of inflation, climbed 14.2 percent year-on-year in November, its highest rise since April 2005, taking economy watchers by surprise. The rise in WPI was led by elevated petroleum product prices, metal commodities and vegetables. The sub-index for manufactured goods, which account for 64.2 percent weight, climbed 11.9 percent from a year ago.
Food prices—particularly that of vegetables—have softened in December. The cut in excise duties on petrol and diesel by the Union government and the value-added tax by the states is also expected to ease inflationary pressures as it will lower the transportation costs.
Below are answers to some essential questions on the topic.
Why is the CPI at variance with households’ perception of inflation?
Much depends on the consumption basket of the household. As for the index, it is constructed with multiple items, each assigned a certain weight in accordance with its consumption within the economy.
For instance, of the 299 items tracked for the CPI, tomatoes are assigned a weight of 0.57 percent. Onions have a slightly higher weight at 0.64 percent and potatoes at 0.98 percent. House rent and milk have the highest weight at 9.5 percent and 6.4 percent, respectively.
Assignment of weights is based on household consumption expenditure data collected by the National Statistical Office collected every five years. Though the weight assigned to tomatoes and onions are small, sharp spikes in their price can impact the index.
When both jump simultaneously, the impact on the price index becomes significant, as was seen in recent months when tomatoes jumped to Rs 100 a kilo across the nation and onions were above Rs 60 a kilo in many parts of the country.
Food prices are traditionally low in winters. But not so this year. Why?
Blame it on the rains. Excessive and unseasonal rains in parts of the country during the past couple of months led to the destruction of standing crops of tomatoes and onions among others. In some areas, the rains came just as these crops were nearly ready to be harvested.
That led to supply shocks, which then created conditions for both wholesale and retail prices to climb. Prices of both vegetables have softened in the past few days as supply improved. Prices of tomatoes are usually more volatile than onions and potatoes, largely due to their shorter shelf life.
Rains had also affected several other crops. For instance, cauliflower prices stayed elevated all through November. The price index for cauliflower was about 16 percent higher than a year ago, CPI data show. Likewise for radish.
Cauliflower and radish are seasonal vegetables that are available in abundance during winters. Retail prices of these vegetables have cooled in December.
The maximum wholesale prices of cauliflower in Delhi declined from Rs 4,500 a quintal at the beginning of November to about Rs 1,500 by mid-December, according to data published on the Agmarknet website. Radish has fallen from Rs 2,500 a quintal to under Rs 1,000 during the same period. Fruits such as grapes were also more expensive in the past month.
It isn’t just fresh groceries that is causing a rise in food inflation. The prices of pulses and edible oils continue to be elevated despite interventions by the Union government to bring down prices, putting upward pressure on inflation.
The CPI data shows that inflation of mustard oil was 43 percent higher in November, from a year ago. Edible oil prices have seen some cooling in the past couple of weeks, giving households some respite.
Domestic prices of edible oils are affected by international prices, as the country is dependent on imports to make up for supply shortfall. Some quantities of pulses are also imported to improve domestic availability and keep prices in check.
International prices of edible oils, particularly palm oil, had soared since the breakout of the pandemic in 2020. Soyabean oil prices were affected by a drought that delayed sowing last year in growing areas such as Brazil.
A spurt in demand from China where soya meal is used for animal feed also put upward pressure on soyabean prices. Palm oil prices climbed after countries such as Malaysia closed borders to immigrant workers to contain the spread of the pandemic.
That created labour shortages at palm oil plantations. Prices of the oil climbed higher when India announced plans to import.
Is inflation set to cool soon?
While food prices contributed to inflation, fuel and power together with crude oil and natural gas put more upward pressure in November. The CPI for November show that kerosene sold through the PDS network was up 71.1 percent, liquefied petroleum gas (LPG) was up 44.1 percent while petrol and diesel were up 23-24 percent.
The rise in other commodity prices, chiefly metal, led to a rise in inflation of various household goods including utensils and appliances as well as two-wheelers.
Crude petroleum and petroleum products were also the largest contributors on the wholesale price index for November - they were 80-100% higher than a year ago.
Some economists now believe that the rise in inflation is no longer transitory but had become structural. The breakdown of supply chains across the world, the shortage of ships, shipping containers and semiconductor chips also contributed to the rise of inflation across the world.
In the US, consumer price inflation climbed 6.8%, its highest rise in almost 40 years in November, due to surging food, energy and shelter costs. Shelter costs refer to rent, owners’ equivalent of rent and lodging away from home.
In his commentary on November CPI, India Ratings chief economist Devendra Kumar Pant said: “India Ratings has been suggesting that the inflation of commodities such as health, fuel and light, and transport and communications has turned structural. Supply shortages are further aiding to higher inflation, which cannot be termed as transitory.”
The trajectory of crude oil prices would be a key determinant of inflation in the months ahead for India as well as for all major oil-importing nations. That would depend on the decision of the Organisation of Petroleum Exporting Countries (OPEC) and its allies on augmenting supplies. Mobility curbs and lockdowns to contain the spread of the Omicron variant can also lead to some softening of oil prices.
Commodity prices would be another determinant. There has been some softening in the prices of metals after the emergence of the Omicron variant.
Earlier, the energy crisis in China had cooled prices of metals from their peak levels. Should the Omicron variant prove benign relative to the Delta variant, the normalisation of the global economy may gather momentum. That would rotate demand away from goods towards services, can also cool the prices of commodities.
The easing of global supply chain bottlenecks could also cool inflation next calendar year. UBS economist Tanvee Gupta Jain in her commentary wrote: “On the global front, some of the important supply-side bottlenecks appear to be easing rapidly. Our global team expects chip shortage to continue well into 2022 but the supply is likely to increase gradually from October/November 2021 at original equipment manufacturers.”
Domestically, the sizeable reduction in petroleum taxes should lower transportation costs and further limit pressures on food inflation wrote QuantEco Research economists led by Shubhada Rao. However, they caution that risks from higher telecom tariffs and GST on clothing and footwear.
“The incoming upward price adjustments from an increase in telecom tariffs and hike in GST rate for select items of clothing and footwear from January would add upside risk to overall inflation.”
Overall, there is confidence that the CPI inflation will remain within the RBI’s comfort range though an unfavourable base will kick in from December.
Priyanka Kishore, an economist at Oxford Economics said that the global forecasting firm expected the CPI to rise further in the coming months on cost pressures. “Cyclical pressures have also bottomed, but could remain muted for longer as uncertainties around the Omicron variant may require even larger vaccination coverage to support a durable recovery in household spending.”
Aditi Nayar, chief economist at rating agency ICRA Ltd in her comments on the CPI said: “The recent correction in prices of many food items other than tomatoes, has provided relief for the inflation trajectory, especially given the unfavourable base effects that lie ahead.”
She expects the RBI to prioritise growth, and maintain policy support to impart durability and sustainability to the recovery as long as the CPI inflation remains within the target of 2-6%. “As of now, there isn’t enough evidence on the durability of the growth recovery to confirm that the stance will be changed to neutral in the February 2022 policy review,” Nayar said.
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