Salutary reminder: On Retail inflation data for January

Inflation should not undermine overall macroeconomic stability

Retail inflation data for January provides a clear reminder as to why the RBI’s Monetary Policy Committee opted last week to not only hold benchmark (a level of quality that can be used as a standard when comparing other things) interest rates but also chose to remain resolutely focused on achieving durable (able to last and be used for a long time without becoming damaged) price stability. While the data for Consumer Price Index-based price gains show the headline number having eased from December’s 5.69% to a three-month low of 5.10% last month, inflation readings for key food items including cereals, vegetables and pulses continued to stay elevated at 7.83%, 27% and 19.5%, respectively, despite moderating (becoming less, or causing something to become less) from December’s levels. Among the vegetables sub-group, 12 of the 19 items monitored (a person who has the job of watching or noticing particular things) by the Centre for Monitoring Indian Economy (CMIE) posted accelerations in year-on-year price gains last month from their readings in December, signalling that the underlying (real but not immediately obvious) trend in inflation is persistently high. Cereals, which have the heaviest weight in the food group, also stayed stubbornly stuck in a higher trajectory, with the month-on-month inflation for the sub-group that includes the key staple of rice, barely nudging (to move slowly and almost reach a higher point or level) lower at 0.75%, compared with December’s 0.76%. Rice was the primary drag, with its price at non-PDS outlets accelerating both sequentially and on-year, by 1.02% and a six-month high pace of 13%, respectively. With a recent CMIE estimate for rabi sowing of rice, revealing a 2.7% drop from last year, the prospect (the possibility that something good might happen in the future) of prices softening significantly (in a way that is easy to see or by a large amount) in the near future appears remote.

The data on reservoir storage levels also add to the disquiet (worry) on the outlook for prices, particularly of food items. With water storage at 150 reservoirs showing live storage as on February 8 at 49% of capacity, and lagging appreciably behind both the year-earlier and average of the last 10-years levels, output of the rabi sown crops, including cereals and more particularly (especially, or more than usual) pulses, are at risk of being impacted. Given food’s large share in the overall consumption (the amount used or eaten) basket, food price gains pose a wider risk to overall price stability (a situation in which something is not likely to move or change), both directly and through spillover (the effects of an activity that have spread further than was originally intended) to the prices of non-food items, as a research article by RBI officials concluded. The central bank’s survey of households’ inflation expectations found the median inflation expectation for three months ahead rose by 10 bps from the previous survey in November to 9.2%, with a greater share of respondents — 78% versus 74% two months ago — expecting inflation to accelerate in the near term. With talks between the government and some farmers’ groups breaking down and farmers threatening (expressing a threat of something unpleasant or violent) to intensify (to become greater, more serious, or more extreme, or to make something do this) an agitation over demands that include assurances on a guaranteed minimum support price, policymakers face a challenge to ensure inflation does not rebound and undermine overall macroeconomic (of or connected with financial systems at a national level) stability.

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