RBI's inflation targeting: Challenges ahead

livemint.com:

Mint poll of 19 economists was knocked out by a huge jump in vegetable prices in general and tomato in particular. Mint examines the details: Retail inflation is measured using the Consumer Price Index (CPI). Nearly two-fifths of the CPI is made up of food items.

So, if food inflation goes up, the retail inflation rate goes up as well. Food inflation over the 12-month period ending July stood at 11.51%. It was primarily driven by a sharp 37.34% spike in vegetable prices, with tomato prices rising by a massive 201.54%.

The prices of ginger, garlic and green chilly rose by 177%, 70% and 50%, respectively. Prices of brinjal, okra, beans, pumpkin and cauliflower were also on fire. Onion rose by 11.7% while potato and cabbage fell by 13.3% and 9%, respectively.

The Reserve Bank of India (RBI) is mandated to maintain retail inflation at 4%. In the July-to- September period, the central bank has forecast retail inflation of 6.2%. The 7.44% rate in July will make it hard for the RBI to meet the target.

As Madan Sabnavis, chief economist at Bank of Baroda, wrote in a note, this means “inflation has to average 5.6% in the next two months... But will this happen?" The jump in food prices might be temporary, but they will still take a few months to cool down, in the process ensuring that retail inflation during July to September is likely to be higher than the RBI’s target. Tomato prices in August have started to fall with new supply.

But prices are still higher than a few months back, having fallen to very low levels in some parts of the country. Also, tomato prices in August 2022 were lower than in July 2022. This will ensure that inflation in tomato prices in August will continue to remain on the higher side and feed into food