Even the core food price inflation showed lower pace in July suddenly at 5.4 per cent overall for the country with notable decreases in vegetables, fruits and cereals. But this is rather surprising, given the experience of food prices in the retail markets. And the trends in food prices in April-May as well as in June 2024.

The sharp drop in inflation rate appears to be a kind of riddle and contrary to what the Reserve Bank expected in its last monetary policy statement. While it qualified its expectations saying that food inflation rate should show favourable trends in July following a base effect of close to 3 per cent compared with the same period last year.

It is only later in the year, in the fourth quarter of the financial year, when the favourable south-west monsoon on the farm sector would have worked itself out that food prices were expected to soften.

As a matter of fact, the policy statement noted with sharp focus the trends in the latest food price inflation, as put out by the department of consumer affairs.

High frequency food price showed to a month on month increase in tomato prices by 62.1 per cent in July, onion prices by 22.6 per cent and potato prices by 18.0 per cent. Prices of key pulses also increased in the range of 0.4 to 4.3 per cent in July.

Let us look at the disaggregated food price inflation rates closely as given in the last monetary policy statement.

Headline inflation, which was at 4.8 per cent in April-May increased to 5.1 per cent in June.

Food inflation surged to 8.4 per cent in June from 7.9 per cent in April-May. Contribution of food to headline inflation increased from 74.7 per cent in April to 75.2 per cent in May and 76.3 per cent in June. The contribution of food was 44.8 per cent in June 2023.

CPI tomatoes increased by 48.7 per cent (m-o-m) in June, CPI onion by 24.2 per cent (m-o-m) and potatoes by 12.2 per cent (m-o-m), resulting in a year-on-year inflation of 29.3 per cent for vegetables. Overall, vegetables with a weight of 6.0 per cent in CPI basket contributed 34.9 per cent to inflation in June.

Cereals inflation increased to 8.8 per cent in June from 8.6 per cent in April. Fruit inflation increased to 7.2 per cent in June from 5.2 per cent April. Pulses inflation at 16.1 per cent in June, recorded 13 consecutive months in double digits.

The riddle is how could food price inflation have dropped so drastically in a single year. It calls for more detailed studies.

Food inflation averaged around 8 per cent during November 2023-June 2024. In the context of high food price inflation, RBI chose to maintain its monetary policy stance than revise it downward as some of the members of the monetary policy committee had strongly urged.

The RBI governor Shaktikanta Das, noted in his statement that the public perception of inflation is coloured by food inflation rates and the inflationary expectations are formed on that basis. Hence, the importance of food inflation in formulating overall monetary policy stance.

Why that is critical is because if the inflation expectations of people at large get skewed towards a high long term expectations of prices, then inflation tends to get “sticky”. In such a situation controlling inflation through conventional monetary policy tools becomes difficult if not at times ineffective.

Since November 2023, the decline in inflation expectations has halted, the RBI had noted in its policy statement. Three-month and one year ahead inflationary expectations rose by 20 bps each in the July 2024 round of the survey over the previous survey round (May 2024).

The ochre riddle in the current inflation scenario is the divergence between core inflation and food inflation. Excluding food and fuel inflation, the overall rate of inflation is showing softening trends. Deflation in fuel is (-) 3.7 per cent in June. CPI excluding food and fuel moderated from in 3.2 per cent in April to 3.1 per cent in May-June 2024, a new low in the current CPI series.

One explanation for this apparent contradiction and divergence between core inflation and food inflation is possibly the supply side shocks to the food items and, maybe, bottlenecks in supplies.

Against this inflationary scenario, the overall economy is doing rather fine. That is, in the growth-inflation dynamics, there is reason to be optimistic about the pace at which the economy is growing.

GST revenues, which can be taken as a proxy for overall economic activity, at Rs. 1.82 lakh crore rose by 10.3 per cent and toll collections expanded by 9.4 per cent during July.

Domestic air cargo and port cargo posted a healthy growth of 10.3 per cent and 6.8 per cent respectively, in June 2024. Aggregate bank credit posted a growth of 15.1 per cent as on July 26, 2024.

Sale of consumer non-durables rose by 2.3 per cent in May 2024, while two-wheeler sales expanded by 21.3 per cent in June. The demand under MGNREGA declined by 21.7 per cent in June 2024 and 19.4 per cent in July, reflecting improvement in farm sector employment. Tractor sales registered a turnaround by recording 3.6 per cent growth in June.

Consumer durables posted a growth of 12.3 per cent in May 2024, and sales of passenger vehicles increased by 4.9 per cent in June. Domestic air passengers rose by 6.9 per cent in June 2024 and 6.0 per cent in July, on the back of a very high base as it increased by 19.2 per cent in June 2023 and 26.3 per centin July 2023.

Steel consumption rose sharply by 14.6 per cent in July 2024. Cement production increased modestly by 1.9 per cent in June 2024. Imports of capital goods expanded by 11.6 per cent during June 2024, while capital goods production increased by 2.5 per cent in May 2024.

Capacity utilisation in manufacturing sector at 76.8 per cent in Q4:2023-24 is the highest in 11 years.

As such, these figures would have warranted a cut in the interest to further encourage the level of economic activity, only if the price situation was a little more stable for the long term. It does not appear so. (IPA Service)