Food prices may be subdued, but only for a while

Surabhi  Mumbai | Updated on February 24, 2019

Despite a lively debate in recent weeks on whether food prices have now moved to being structurally low, analysts believe that this is only a transient phenomenon and food prices, on a sequential basis, have already begun to rise.


Retail inflation may be at an 18-month low but prices, especially of food items, are likely to see a pick-up over the next few months with average inflation expected to be at about four per cent in 2019-20.
Despite a lively debate in recent weeks on whether food prices have now moved to being structurally low, analysts believe that this is only a transient phenomenon and food prices, on a sequential basis, have already begun to rise though they may be in the negative in a year-on-year comparison.
An exact timeline on when prices will begin to rise is difficult to predict, they said but believe that it is likely in the next three to four months.
“This is a transitory behaviour of food inflation as supply-demand mismatch pulls down prices. It is typical when there is a glut in agriculture,” said NR Bhanumurthy, Professor, NIPFP, noting that there are already signs emerging that the rabi harvest will be lower than expected and will lead to a contraction in prices.
 

Global prices

International commodity prices are also subdued, which have contributed to the falling prices in India, he noted.
According to DK Joshi, Chief Economist at CRISIL, food inflation has been much below the trend. “The average inflation in the last 20 years was about 6.5 per cent. Deflation in food inflation is not permanent,” he said, pointing out that an economy with a 7 per cent growth cannot sustain inflation at such low levels. For 2019-20, retail inflation is expected at 4.5 per cent, he said.
Consumer price index (CPI) based inflation is at an 18-month low of 2.05 per cent in January this year with consumer food price inflation dipping to a negative of 2.17 per cent. Wholesale price index (WPI) based inflation also fell to a 10-month low in January to 2.76 per cent though the rate of price rise in the food basket rose to 2.34 per cent in the month as against a deflation of 0.07 per cent in December 2018.
Analysts say that prices of pulses and non-crop food items like fruits and vegetables are already rising. (See Chart)

RBI rate cuts

Moving to a neutral stance, the Reserve Bank of India’s Monetary Policy Committee in February lowered the repo rate by 25 basis points and also cut down its inflation forecast for the first half of 2019-20 to between 3.2 per cent and 3.4 per cent from its previous projection of 3.8 per cent to 4.2 per cent. For the fourth quarter this fiscal, it revised its inflation estimates to 2.8 per cent.
Experts believe that there is space for another rate cut in April though inflation is likely to rise.
“We track February at 2.45 per cent with food deflation persisting. The current disinflation was led by lower core inflation. Going forward, as CPI inflation should average at 2.5 per cent in the March quarter, making room for the April 4 rate cut,” said Bank of America Merrill Lynch in a report, adding that it expects inflation will cross 5 per cent in the December quarter, well above the RBI’s 3.9-per cent forecast.
https://www.thehindubusinessline.com/economy/food-prices-may-be-subdued-but-only-for-a-while/article26357890.ece

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