India’s heat is now a better predictor of food prices than rain

By Lou Del Bello

Tracking rising temperatures is becoming a better way of forecasting food inflation in India than the rain patterns economists have typically relied on, according to HSBC Holdings Plc.

The link between extreme heat, exacerbated by climate change, and the price of agricultural commodities in India has strengthened over the past decade, the bank said in a report released Thursday. The correlation between temperatures and cost of perishable staples such as fruit and vegetables in the country rose to 60 per cent this year from 20 per cent in 2014, it said.

Inflation remains well above the Reserve Bank of India’s 4 per cent target due to volatile food costs, prompting the authority to hold its policy rate for the last year and a half. HSBC said it expects consumer-price gains to ease toward the end of the year as temperatures drop after the summer heat wave. But “over the medium term, rising temperatures could become a big problem for inflation management,” it said.

Analysts used to estimate food inflation changes by looking at the levels of India’s reservoirs, a measure that the bank’s economists said may soon become obsolete. This is possibly due to improved irrigation systems that mitigate the impacts of scarce rainfall, while there is currently no solution to shield crops from extreme heat, they said.