-
Tomato prices have surged to over Rs 100 per kg across cities, almost three-fold over a period of four months. By the end of July, onion prices were also seen rising to a 19-month high in the country's largest wholesale onion market in Lasalgaon
A visit to the vegetable market in the last few days would have given people a shock. Veggie prices have hit the roof, with tomato prices going as high as Rs 100 per kilogram.
However, official data points a different picture—retail inflation has hit a record low. Inflation, as measured on the consumer price index (CPI), declined to 1.54 per cent in June, its lowest since 2012. CPI inflation was at a record low of 2.18 per cent in May.
The headline inflation number demonstrates the overall inflation in the economy. It combines data from all categories, which include food, beverages, health, education, housing, fuel, electricity and clothing. While prices of food and fuel can be volatile, these are excluded in the core inflation data, which has stayed close to 4 per cent.
The discrepancies in headline numbers would have one believe that the record high prices of some vegetables are not being reflected in the inflation data.
But, to put the numbers into perspective, food and beverage price index accounts for close to half of the CPI basket. Pulse prices were mainly responsible for driving down the June inflation data, which tumbled 22 per cent.
Due to record foodgrain production and continued imports, prices of pulses like arhar and chana dal fell sharply in the last six months. Prices of other food items like garlic and black pepper also recorded a tumble. This has so far weighed on record low retail inflation numbers. But that may not be the case for long.
Tomato prices have surged to over Rs 100 per kg across cities, almost three-fold over a period of four months. By the end of July, onion prices were also seen rising to a 19-month high in the country's largest wholesale onion market in Lasalgaon.
Economists explain that CPI inflation data compares our payment in a particular month, as against prices in the same month a year ago, and therefore is not reflection of month-on-month changes.
“Inflation data compares year-on-year prices. So, in a way, it is not reflective of the current situation. We have seen vegetable prices go up. Post GST, we are also paying more for most of the services. So, on a YoY basis, while inflation is still expected to remain low, there will be a spike from July,” pointed out Madan Sabnavis, chief economist at CARE Ratings.
Some of this is already visible if one looks at the retail inflation index values. In June 2017, it stood at 132.1, as against 131.4 in May and 130.3 in January. Therefore, even as headline numbers suggested that inflation was at a record low in June, prices started creeping up sequentially.
The Reserve Bank of India cut its benchmark repo rate by 0.25 per cent to 6 per cent, to factor in the sharp drop in CPI inflation, which was well below its lower end of the targeted 2-4 per cent. It is concerned by the recent surge in some vegetable prices.
“While inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive. In the case of inflation-sensitive vegetables, prices are recording spikes,” the central bank said in its assessment this week.
It also noted that, in the recent months, price pressures were building up on animal proteins.
The monetary policy committee will, therefore, continue monitoring inflation to ascertain if the recent drop in CPI inflation is transient or if a more durable disinflation is underway.
Rising vegetable prices are not the only factor. The government is also slowly reducing subsidies on kerosene and LPG. Oil marketing companies were recently authorised to increase effective price of subsidised LPG by Rs 4 per cylinder every month, effective from June 2017. Given time, this will reflect on the inflation figures. Higher house rent allowances for government employees under the seventh pay commission payouts will also have an adverse impact.
“Clearly, inflation is unlikely to fall beyond what we saw in June. We expect it to rise slowly to around 4 per cent by the end of the year,” said Sabnavis.
Apart from the sharp rise in vegetable prices, which will weigh on near-term inflation, economists also point to lower base effects of last year, which will be reflective in higher inflation in the second half of this year.
"We believe CPI inflation troughed in June and we expect it to rise gradually by the end of 2017; as deflation in food wanes, base effects will turn adverse and higher house rent allowances for central government employees will raise housing inflation from July,” said Sonal Varma, chief India economist at Japan's Nomura Securities.
Adverse base effects alone will add 1.5 per cent points and 0.4 per cent points to headline and core CPI inflation respectively in the second half of 2017, Varma estimates.
Furthermore, factors such as surging rural wages, higher minimum support prices and narrowing output gap will push up inflation in 2018.
Nomura estimates headline CPI inflation to average around 3.8 per cent in 2017 and a sharply higher 5.5 per cent later.
Morgan Stanley has cut its full-year inflation forecasts slightly due to a good monsoon and a benign impact of GST, but it too believes that inflation troughed in June and the trajectory will be that of a gradual rise.
For the current fiscal year, it expects CPI to be at 3.2 per cent, which it sees rising to 4.3 per cent in 2017-18.
HSBC's chief India economist Pranjul Bhandari too feels that the excessively low level witnessed in inflation this fiscal is not sustainable as some of the drivers are short-lived and 4 per cent inflation may just be the new normal.
