Spillovers from tomato price spikes to prices of other commodities and unhinging inflation expectations remain a major concern, according to an article in Reserve Bank of India’s latest monthly bulletin.

Increasing amplitudes of price spells over the years calls for improving the supply chains to contain overall inflation volatility, per the article titled “State of the Economy”.

In the last couple of months, tomato prices have vaulted over ₹100 a kg, reaching almost ₹200 a kg in some markets, due to crop damage and pest attacks in the major production belts.

The recent spike in tomato prices on account of crop damage due to inclement weather and pest attacks in the major production belts has received widespread attention as it has taken a toll on households’ budgets, per the article put together by senior RBI officials.

Overall inflation

“Historically, tomato prices have been an important contributor to volatility in overall inflation....Its volatility also gets transmitted to prices of other vegetables in both retail and wholesale markets,” they said. 

The officials noted that tomato, being a highly perishable item with a very short crop duration, exhibits considerable seasonal variation in prices but these episodes are short lived.

According to their analysis, the average duration of a high price episode, derived from the Markov Chain transition probability matrix, shows that prices stay above ₹40 for an average duration of 2.6 fortnights whereas prices remain below ₹20 for an average duration of 10 fortnights.

“Multiple crop cycles with varying time spans across locations lead to more than one spell of price spike within the same year. While the yearly peaks have exhibited a general increase, the troughs have remained largely constant, indicating that prices do not ratchet up across spells,” the officials said.

Wholesale prices

Empirical estimates show that even though margins (the wedge between wholesale and retail prices) respond to shocks, their elasticity to wholesale prices is low — for a one per cent rise in wholesale prices, the wedge increases by 0.1 per cent.

Thus margins act as a shock absorbing mechanism and, therefore, inflation in retail prices is less volatile than wholesale.