Representative image showing an illustration of inflation graph.
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The latest data on inflation for December, released by the National Statistical Office (NSO), showed that retail inflation was on the rise and higher than in November. It rose to a four-month high of 5.69%, driven by higher food inflation. It was expected, and the RBI had stated that “the near-term outlook is masked by risks to food inflation which might lead to an inflation uptick.” The Consumer Food Price Index moved up from 8.7% to 9.53% in December, mainly due to the rise in prices of cereals by 9.93%. All cereals, including coarse cereals, have seen steady increases in price in the past few months. The prices of pulses have gained at a faster pace, and were at a 43-month high in December. They may rise further as the Rabi crop may be lower than in the previous year. Cereals and pulses are the most important items in the food basket of ordinary households and the rise in their prices would really hurt.
Vegetable prices have also increased at a high pace in the past few months. Tomatoes and onions saw the highest increases, by over 33% and 74%, respectively, over that in December 2022. But vegetable prices vary in the short term, depending on seasonal factors and the supply situation. Overall, all food items have seen an increase in prices, and that is a challenge. RBI Governor Shaktikanta Das has said this week that food inflation will be on top of the central bank’s agenda. He said core inflation has been falling, but inflation is difficult to predict because it is subject to many international developments and weather events. The present inflation levels are much higher than the RBI’s tolerance levels. Its latest projection for the current financial year is 5.4% and the expectation for 2024-25 is 5.2%. The present trends indicate that the final figure may go above the projections.
Next month, the interim Union budget will be presented and the RBI’s Monetary Policy Committee will hold its meeting to evaluate the inflation position. It is unlikely that either event will impact the trend of inflation. The MPC is likely to stick to the status quo on rates. Continuing inflation can hurt the economy and household budgets. It is particularly difficult when inflation is led by food inflation. It leads to suppression of demand and a fall in consumption, as is being seen currently. Consumer demand has been at low levels for many quarters and a further fall could drag growth down.