Monetary policy has a food inflation nightmare

India’s headline inflation typically follows movements in food inflation, as food occupies 39% share in the average consumer’s basket.

Thus, understanding food inflation dynamics becomes critical to gauge the overall inflation outlook, especially in a year it has been driving the surge in the Consumer Price Index-based (CPI) inflation.

Our analysis in this Insight brings us to the following key conclusions:

• The recent rise in food inflation is mainly supply shortages-led, driven by both global (geopolitical conflicts) and domestic (impact of heat wave) factors. We expect overall CPI inflation at 6.8% and food inflation at 7% for the current fiscal
• A normal and well-distributed monsoon can help cap the upside to food inflation. But other factors such as rising input costs and global prices, and government interventions have gained importance in shaping the inflation outlook this fiscal
• Among these, high cost of inputs in agriculture production (fertilisers, pesticides, animal feed and diesel) is expected to maintain pressure on food inflation through this fiscal. Despite recent softening in international prices of several food items, they remain higher than last year so far and the rupee has weakened offsetting some of the impact of falling international prices for imported food items. The government’s targeted interventions such as restrictions on wheat exports and import duty cuts on edible oils and pulses, could mildly help dampen the pass-through of global price pressures on major imported items
• But beyond the current shock, data suggests that extreme weather events are increasingly adding uncertainty to the food price outlook. It has, therefore, become imperative for central banks, particularly inflation-targeting ones, to take heed of the increasing role of climate change and weather disruptions while forecasting inflation