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Analyzing Persistence of High Inflation Due to Food Prices



  Feb 15, 2024

Analyzing the Persistence of High Inflation Due to Food Prices



Why Food Prices May Keep Inflation High

The persistence of high inflation, particularly in the food sector, can be attributed to several factors. Elevated prices of vegetables, cereals, and pulses, despite a slight downtick in food price inflation in recent months, play a crucial role. While Consumer Food Price Inflation (CFPI) saw a reduction from 9.5% in December to 8.3% in January, it remains significantly higher than October’s 6.6%, indicating a sustained pressure on overall inflation rates.

Which Items Are Contributing to High Inflation

The primary contributors to the high inflation rate are:

Vegetables: Prices have remained firm even in the early days of the current month, showing little sign of significant decline.

Cereals: Although there has been a slight cooling, cereal inflation remains high at 7.8% after 15 consecutive months of double-digit increases.

Pulses: Along with cereals and vegetables, pulses continue to exert upward pressure on food inflation.

Impact of High Food Prices on Inflation

The impact of high food prices on overall inflation is multifaceted:

Sustained Retail Inflation: Retail inflation cooled to a three-month low of 5.1% in January, but high food prices threaten to keep it from falling further.

Risk to Core Inflation: Elevated food inflation could spill over into core inflation through a wage-price spiral, as higher food prices lead to increased wage demands, further fuelling inflation.

Disruption of Disinflation Process: Recurring food price shocks pose a risk to the disinflation process, potentially de-anchoring inflation expectations and generalizing price pressures, as noted by RBI Governor Shaktikanta Das.

Remedy for High Food Price-Driven Inflation

Addressing high food price-driven inflation requires a multifaceted approach:

Supply Chain Improvements: Enhancing the efficiency of supply chains can help in the timely distribution of food products, reducing bottlenecks that contribute to price increases.

Agricultural Policy Reforms: Implementing policies that increase agricultural productivity and reduce dependency on weather conditions can help stabilize prices.

Market Intervention: Strategic release of food stocks and market intervention by government agencies can help temper sudden spikes in food prices.

Monetary Policy Adjustments: While the RBI has projected average inflation of 5% for the quarter, careful adjustments in monetary policy could help manage inflationary pressures without stifling economic growth.

In conclusion, while recent data suggest a marginal easing in food price inflation, the continued high prices of key food items like vegetables, cereals, and pulses indicate that inflation may remain elevated in the near term. Addressing this issue requires coordinated efforts across supply chain management, agricultural policy, market intervention, and monetary policy to ensure inflation targets are met without compromising economic recovery.

SRIRAM’s


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