Inflation hump: Will it continue beyond October?

Two of the six members of the Monetary Policy Committee (MPC) noted a near-term retail inflation “hump” in the October policy meeting. This is expected to have played out in October, with economists projecting inflation close to the upper tolerance limit of the Reserve Bank of India. 

Retail inflation is seen at 5.95% from October, rising from 5.49% in the previous month, per the median projections of 18 economists polled by Mint. Blame the continuing rise in food prices and the fading base effect.

If inflation for October turns out to be as projected, it will be the highest in 14 months. Food prices, especially those of vegetables and edible oils, already contributed significantly to inflation in September. This trend worsened in October, with more food items witnessing sharp price rises from a year earlier. 

According to retail food prices reported by the Department of Consumer Affairs (DCA), potatoes, onions, and tomatoes were 50%, 44%, and 115% higher in October than a year earlier. Edible oil prices were also higher by 11%, while gram pulses were higher by 14%.

“Apart from the thinning of the high base effect, sustained food price pressures drove inflation higher to the 6% threshold,” Union Bank of India said in a report dated 8 November.

No relief November

The sharp price rise expected for October is along expected lines, even as touching the upper limit even temporarily may keep the central bank wary of easing its policy rate any time soon. 

While the price pressures are expected to ease in the coming months, high-frequency data for November so far shows a persistent rise in prices. As per a Mint analysis of the retail prices of 22 food items as reported by DCA, 17 have recorded a year-on-year rise in November so far. In October, 18 items had recorded an increase.

The number of items recording above 10% year-on-year rise has increased to eight from seven the previous month. The offenders behind the increase are the same, barring onions, which saw their prices decline.

Last month, the MPC changed its stance from ‘withdrawal of accommodation’ to ‘neutral’ to remain “unambiguously focused on a durable alignment of inflation with the target, while supporting growth”. This means that monetary policy decisions will be based on data, and November prices do not offer much relief. 

Economists have largely pushed their rate cut calls to February, with an expectation of food prices easing from December, broadly in line with the seasonal trend.

Cautious approach

Food prices usually ease during winter as new crops hit the markets. Data for the past five years show a sizeable decline in prices during October-December, with a couple of years seeing a delayed cooling after November. Nevertheless, food prices are largely expected to cool by December on account of good kharif (monsoon crop) production.

However, this may not be sufficient to put the central bank in easing-cycle mode. Reserve Bank of India governor Shaktikanta Das noted in October that while the neutral stance provides greater flexibility to act according to the evolving outlook, there may be uncertainties on the horizon from heightened geo-political tensions and volatile commodity prices to risks of adverse weather in food inflation, which cannot be underestimated.

While food prices are largely expected to ease by December, making a case for RBI to look through the near-term hump, other risks may change the projected trajectory for inflation.