How vegetables became inflation villain yet again
NEW DELHI : Vegetables’ contribution to retail inflation surged to a 42-month high in July while that of tomatoes rose to a 65-month high, unexpectedly taking the headline figure beyond the 7% mark for the first time in nearly a year, a Mint analysis showed. One-third (32%) of the total year-on-year (y-o-y) shift in the Consumer Price Index (CPI) in July came from the sharp rise in vegetable prices alone, with more than half of this coming from tomatoes, posing a dilemma for the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) that has held rates steady since April. On a y-o-y basis, overall retail prices rose 7.4%, vegetable prices rose 37%, and tomato prices tripled last month, data released on Monday showed.
However, all items have different weights in the retail inflation basket based on their consumption levels. Hence, an item’s contribution to inflation becomes a more useful way to assess its impact in lifting overall household budgets relative to other items. In an ideal scenario, an item would contribute just as much to changes in CPI as its weight in it.
Vegetables have a 6% weight in the CPI basket, and tomatoes, a sub-item under vegetables, 0.57%. This effectively means that if vegetables were not part of CPI, inflation would be just 5.4%, not 7.4% as it turned out. In other words, vegetables alone dragged up retail inflation by over 200 basis points (bps).
For eight straight months until June, vegetable prices had been a downward force on overall inflation. Tomatoes have been a major cause of the change in trend due to a massive shortage and surge in prices. This was only the seventh time since 2012 that vegetables pushed retail inflation upwards by 200bps or more.
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