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Influence of Rising Vegetable Prices on Retail Inflation



  Aug 19, 2023

Food Inflation: impact of Vegetable Inflation on Retail Inflation


1. What caused the surge in retail inflation in India?

A surge in vegetable prices, particularly tomatoes, led to a 42-month high in retail inflation. This unexpected increase pushed the headline retail inflation figure beyond 7%, marking the first time in almost a year.
 

2. How much of the shift in Consumer Price Index (CPI) was attributed to vegetables?

Around one-third (32%) of the year-on-year shift in CPI for July resulted from the substantial rise in vegetable prices. Tomatoes contributed significantly to this increase, posing a challenge for the Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC).
 

3. How did other items in the retail inflation basket fare in comparison?

On a year-on-year basis, overall retail prices rose by 7.4%, while vegetable prices surged by 37%. Different items have varying weights in the CPI basket, making it more insightful to assess an item's contribution to inflation in terms of its impact on household budgets relative to other goods.
 

4. How did vegetables' contribution affect the overall inflation rate?

Vegetables' inclusion in the CPI basket accounted for 6% of the weight, while tomatoes, categorized under vegetables, carried a weight of 0.57%. Excluding vegetables from CPI would have resulted in an inflation rate of 5.4%, emphasizing that vegetable prices drove retail inflation up by over 200 basis points.
 

5. What was the trend in vegetable prices before this surge?

For eight consecutive months until June, vegetable prices had a downward influence on overall inflation. However, tomatoes emerged as a major driver of the trend reversal due to supply scarcity and a consequent surge in prices.
 

6. Why are potatoes, onions, and tomatoes particularly important in this context?

These vegetables hold significance due to their usage in daily food items and their capacity to introduce volatility to headline inflation. The behavior of these vegetables in the inflation context has varied, with onions and potatoes contributing significantly in the past.
 

7. How have tomatoes impacted inflation this year?

Tomatoes have demonstrated higher price sensitivity, contributing beyond their weight in 52 out of 97 comparable months. The substantial rise in tomato prices, contributing to inflation, poses a challenge to the MPC's decision-making process.
 

8. How does the RBI respond to short-lived inflationary shocks?

The RBI's research indicates that seasonal increases in high tomato prices tend to be short-lived, lasting around 2.6 fortnights on average. This suggests that the MPC might not make significant shifts in monetary policy decisions based on short-lived fluctuations.
 

9. What does this phenomenon mean for monetary policy formulation?

The substantial contribution of vegetables, especially tomatoes, to retail inflation underscores the complex nature of inflation dynamics. Monetary authorities face the challenge of balancing price stability amidst such fluctuations when formulating monetary policy.
 

10. Will the RBI raise the repo rate in response to this inflationary pressure?

While the RBI's Monetary Policy Committee tries to control inflation by adjusting the repo rate, the probability of an immediate rate hike is low due to the central bank's limited control over food prices. The current rate might be maintained, considering the influence of high food prices on overall inflation.


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