Food inflation: Blame supply shortfalls as well as bad policy interventions

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Subscribe to enjoy similar stories. Retail inflation estimates for September 2024 released earlier this week based on the Consumer Price Index (CPI) have confirmed fears of an upswing driven by food prices. Rural retail inflation is at 5.9% and the urban figure at 5%, with overall inflation at 5.5% on a year-on-year basis.

Retail inflation in July and August was around 3.6%, a sharp decline from an average of 5% in the preceding 12 months, primarily on account of a high base last year. So any euphoria over inflation going below the Reserve Bank of India’s (RBI) target of 4% in those two months was unwarranted. September estimates suggest that inflation may have stabilized at around 5% or above, as has been the story of the past two years.

What should worry policy makers is not just the overall inflation rate, which remains above RBI’s comfort zone, but food inflation, which was above 9% in both rural and urban areas last month. Barring July-August, food inflation has hovered in a range of 8-9% since November 2023. Controlling food inflation is a challenge and it is amply clear that monetary policy is unlikely to be effective.

Nor is the chief economic advisor’s suggestion of excluding food from RBI’s inflation targeting framework relevant, given the disjunction between RBI’s objectives (and policy instruments) and the nature of food inflation in the country. There has been much discussion on the seasonal nature of food inflation, but this is at best a partial explanation of why it has been so stubborn. While vegetable inflation in September was reported at 36%, much of it’s on account of tomato, onion and potato prices, which make up almost a third of the weight of vegetables in the CPI consumption basket.