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Resource centre on India's rural distress
 
 

Food inflation at four-year low of 1.8%
-The Business Standard
 
Economists question veracity of the data; say too early for RBI to cut rates.

Food inflation for the week ended December 10 fell to a four-year low of 1.81 per cent, after declining to 4.35 per cent last week. The decline is much sharper than what Chief Economic Advisor Kaushik Basu expected — he had predicted less than three per cent food inflation by early January. What’s more, many had not accepted his optimism.

A month ago, food inflation stood at a little over nine per cent, and over 18 per cent in December last year. The high base effect of last year had some role in inflation numbers falling to such a low. In the corresponding week last year, food inflation, which has a weight of little over 14 per cent in the Wholesale Price Index (WPI), was up nearly three percentage points to 13.22 per cent.

Sustainability of these numbers pose a big question. Besides, the depreciating rupee may dismantle the rosy picture of declining trend in food inflation.

Wheat, vegetable, potato and onion saw a decline in prices. Vegetables saw more than a double fall in prices against last week’s prices, as inflation in these articles declined to (-) 26.37 per cent from (-) 12.28 per cent the previous week. The rate of price rise in potato also fell to (-) 34.39 per cent against (-) 33.28 per cent. In case of onions, inflation touched (-) 49.38 per cent from (-) 46.03 per cent.(Click here for table & graph)

Barring pulses, protein-based items saw either a slight moderation in inflation or a small increase. Eggs, meat and fish were down by a 0.01 percentage point to 9.25 per cent during the week ended December 10. Milk reported an increase in the rate of price rise to 11.19 per cent from 11.08 per cent the previous week. Pulses, however, saw inflation moving up to 14.22 per cent from 11.76 per cent before.

While most economists are not jumping to a conclusion to definitely say such a low number could become a trend in the long run, some are not ruling out the possibility of food inflation moving to the negative zone in the coming weeks. Negative inflation means food prices would see a fall year-on-year.

“The decline in the numbers is nothing to cheer about because it is it is more of a seasonal and base effect,” says Siddharth Shankar, director, KASSA. “RBI tightening has had little impact, and going forward, I do not expect inflation to fall substantially.”

The high base effect alone could not explain such a decline in food inflation and final numbers could be higher, according to economists. “There could be some issues with the numbers, and they may be revised upwards in the coming week,” notes Arun Singh, senior economist, Dun and Bradstreet.

Anis Chakravarty, director with Deloitte, Haskins and Sells, also questioned the numbers. “Can the numbers improve so drastically in such a short span of time?”

The drastic fall of rupee against the dollar would also impact the food inflation numbers or headline inflation numbers on the back of high import bills for some of the components of the WPI.

So, do we see headline inflation falling below nine per cent for December? Yes, says Singh. “Overall inflation for December will definitely be in the range of 8-8.5 per cent.” Food inflation numbers also have a spill-over effect on manufacturing, so overall inflation will also see moderation in inflation, he adds.

However, CARE Ratings chief economist Madan Sabnavis says food inflation will only fall from here due to good kharif crop in winter and high base effect of last year.

As RBI kept unchanged key policy rates on December 16, economists say the bank cannot start looking for a rate cut so soon. “If RBI starts cutting rates, it will have a bad influence on inflationary expectations, as they will shoot up,” says Singh.

After 13 rate rises since March 2010, RBI had pressed a pause button early this month, as economic growth declined to 6.9 per cent in the second quarter of this year.