Our recent drop in inflation has proven short-lived but it is high food inflation, especially for cereals, that threatens to make matters worse for those who have already been in distress. India’s January inflation numbers were contrary to expectations, but aren’t really all that surprisingIndia’s January inflation numbers were contrary to expectations, but aren’t really all that surprisingEstimates of inflation based on the consumer price index (CPI) released for the month of January by India’s ministry of statistics and programme implementation have put to rest any hope that our fight against inflation is over. The moderation in inflation numbers for November and December was rather short-lived, with inflation back above the Reserve Bank of India’s (RBI) upper bound in January at 6.52%, along with a higher inflation print for rural areas at 6.85%. More than overall inflation, though, it was food inflation that surprised many. While overall consumer food price inflation increased from 4.2% in December to 6% in January, the cereal inflation rate was at more than 16%, the highest since the new series was adopted. And even for cereal inflation, price pressures were more pronounced in rural areas, with rural cereal inflation reported at 17.2%, significantly higher than in urban areas, where that rate was 13.8%. India’s January inflation numbers were contrary to expectations, but aren’t really all that surprising. There are two characteristics of the recent inflation episode that are particularly worrying. First, cereal inflation continues to remain a challenge, primarily driven by the price of wheat, but these pressures have now spread to other food items. While wheat prices increased by 25% from a year earlier, a record-high in the last decade, even rice inflation was at 10% amid a rising trend in the last several months. Within food, eggs and milk also reported inflation at 9% and an increasing trend. Egg inflation was negative until October last year, but has jumped sharply since then. Second, while food inflation continues to remain a challenge, inflation has now spread to other goods and services, making it much more broad-based. Transport and recreation, with a combined weight of around 9-10%, were the only group with an inflation rate of less than 6%. For the rest of the non-food group accounting for more than 50% of the weight in rural areas, inflation was 6% or more, with clothing and footwear at 9.1%, fuel and light at 10.8%, household goods and services at 7.3%, health at 6.4%, personal care at 9.6% and the miscellaneous group at 6.2%. These disaggregated estimates also raise questions on the nature of the current spell of inflation and the policy response needed to address it. The rural economy is still in distress amid declining agricultural profits and stagnant wages. Worryingly, there is enough evidence to suggest that even the urban middle class is not doing any better. It is not surprising then that rate hikes by RBI have played no role in containing inflation so far. In a demand-constrained economy, more so in case of cereals, which are an essential consumption item, monetary policy is unlikely to be of any help. Unlike developed countries, where food inflation is not much of a concern, given a decline in international prices for most food items, it is cereal and food in general which is really driving Indian inflation.
