Rising prices of tomato, onion, potato push up food, overall inflation

The Monetary Policy Committee (MPC) in all probability may have to push the pause button in the next review meeting scheduled to be held during September 29-October 1, as food inflation continues to see a spike.

In the last 24 days, prices of tomato, onion and potato (TOP) have registered 20 per cent increase. The prices of potato and pulses continue to rule high. This is expected to further fuel overall retail inflation.

Food inflation has a weightage of nearly 40 per cent in overall retail inflation. A study by the Institute for Advanced Studies in Complex Choices (IASCC) shows that food inflation during the pandemic period touched nearly 20 per cent in urban areas and nearly 14 per cent in rural areas.

Data from the Department of Consumer Affairs show that prices of key vegetables — tomato, onion and potato (TOP) — are seeing significant increase, not just in the current month, but since August 1. For example, prices of onion saw 20 per cent increase in the current month and 40 per cent since August 1. Similarly, prices of tomato jumped 20 per cent during the current month and 50 per cent in comparison to August 1.

DK Srivastava, Chief Policy Advisor at EY India, said that the sharp surge in prices of vegetable and pulses is largely a seasonal influence. In August, vegetable prices showed a year-on-year inflation of 11.4 per cent, which was well above the overall CPI inflation of close to 7 per cent.

“These price pressures are largely driven by supply-side factors, including excess rainfall, especially in some of the western and southern states, leading to disruption in the output and supply of vegetables,” he said.

Anil K Sood, Professor and Co-Founder of Hyderabad-based IASCC, found that during the last couple of years (March 2018 and February 2020), economic growth has been slowing down, the food inflation has been much higher than general inflation (7 per cent versus 5.2 per cent) and also higher than the level experienced during the period characterised by higher economic growth — January 2018 and March 2020. “The pandemic has only made it worse, with food inflation hitting nearly 20 per cent, up from 7 per cent during the slow-growth period,” he said.

On the other hand, the rural consumer food inflation has not been as bad versus urban food inflation during the slowing growth period. The pandemic has, of course, impacted the rural consumer too with inflation going up from 4.4 per cent (during March 2018 to February 2020) to 13.7 per cent.

Srivastava thinks the monetary authority is likely to pay greater attention to the overall CPI inflation rather than sectoral or commodity-wise inflation rates, particularly if these are driven by seasonal factors. “However, even the CPI inflation rate has remained at levels close to 7 per cent which is well above the upper tolerance limit of 6 per cent of the monetary policy framework. As such, RBI may prefer to maintain status quo on the policy rate,” he said.

Sood said MPC will need to take into consideration the elevated level of food as well as general inflation, which has reached double-digit levels. Lower cost of finance combined with excess liquidity can definitely create inflationary pressures, as the intermediaries are able to control supply without impacting their margins. “At the same time, there is, of course, no reason to lower the interest rates or pump in additional liquidity, as investment or consumption demand is not rate-dependent,” he concluded.

Table 1

Food prices

(Rs/kg)

Source: Department of Consumer Affairs

Table 2

Retail Inflation

(In %)

Source: The Institute for Advanced Studies in Complex Choices