Can we be sure of food inflation?

TREND SHIFTS IN FOOD PRICE LEVEL AND PRICE GROWTH PORTEND PERSISTENCE, NOT REVERSION

- RENU KOHLI

Food inflation has now sustained for several years, attracting a range of stringent measures combined with numerous supply shocks.

These developments raise several policy challenges, including monetary policy. In recent months, an increasing divergence in core and headline inflation has held back monetary easing due to strong price growth in vegetables, even as that in cereals varies 7-8% upon double digits one year ago.

The current expectation is that good monsoons and crop-sowing should moderate food prices ahead with a pathway for the Reserve Bank of India to lower interest rates.

How sure can we be about such a scenario?

Looking back at the five-year period from 2019 to now, there are noticeable departures in food price behaviour that could be indicative of structural breaks or trend shifts in both the level and price growth or inflation.

Consider some key changes in April 2019-October 2024 relative to the preceding six years, April 2013-March 2019.

It is well-known that wholesale and retail food inflation averages much higher in the latter period at a respective 5.6% and 6.7% a year each month against 4% previously.

There's a pronounced shift in price level too, with the wholesale and retail food indices moving up an average ~36 and 40 points over the pre-2019 level – a 28% and 31% rise.

An important difference is the lasting push of food inflation since April 2019 compared to more short-lived surges before.

For example, the longest pre-2019 surge in April 2012-August 2014 lasted about two years, relieving the pressure upon headline inflation thereafter.

The current one persists for more than five years to date.

Food supply shocks have successively shorter intervals.