Why inflation may continue to inch up

The trend of falling inflation may not sustain, indicated a Business Line article dated June 13 ( Down and out: Why food inflation may pick up from here ), after the CPI reading of 2.18 per cent in May.

The reasons given were — one, the fall was driven by surplus production in fruits, vegetables and pulses and was not broad based; and, two, there was offloading of stocks by traders before GST which was just a temporary phenomenon.

Now, with August month’s CPI numbers out, it looks like things are playing out as expected.

On Tuesday, government data showed that in August, the consumer price inflation increased 3.36 per cent, up for the second consecutive month and higher from June’s 1.46 per cent. The July numbers came in at 2.36 per cent.

Increase in cost of services — housing, transport & communication and recreation — post GST impacted the rise, but the climb was mainly due to higher cost of food items.

Vegetable inflation which was at a negative 16.5 per cent in June, rose to 6.16 per cent in August. Similarly, inflation in fruits moved up from 1.98 per cent in June to 5.29 per cent in August.

Price of pulses continued to fall though, nullifying some of the impact from higher vegetable and fruit prices. In the months to come, however, inflation may only head upwards. In pulses, except for urad, kharif sowing is down. In vegetables, there is a long time before fresh arrivals in onions and potatoes begin, so prices may only inch up due to lower supply.

For key vegetables — onions, tomatoes, potatoes and also pulses — masur, tur and urad, July to November/December is a critical period as on the one hand, it is a lean period for arrivals, and on the other, demand is high with festival season starting.

Prices begin to moderate only with the arrival of kharif crops which will start by mid-to-late December. Though, the pattern of price movement is similar every year, the quantum of price change in the lean months in a year is dependent on several factors including the import/export policy of the government and the year’s expected production.

The latest update (as of September 8) from kharif sowing for the year shows that the area under pulses (overall -3.9 per cent and arhar -17.9 per cent), coarse cereals (-1.4 per cent) and oil seeds (-9.59 per cent) is lower relative to last year. This follows deficient rains in Delhi, Haryana, eastern UP, Madhya Pradesh, parts of Maharashtra, Kerala and coastal Karnataka from June 1 to September 6.

If foodgrain output is lower this year, and imports rise, global food prices movement will influence prices here too.

The FAO Food index, which dropped significantly between March 2014 and March 2016, has been moving up steadily for more than a year, and prices in the domestic market may also catch up.

The moderate inflation over the last two years, was also due to lower global food prices.

In pulses, for instance, it was the large scale import of cheaper pulses that pushed prices sharply down.

India’s pulses import stood at 6.6 million tonnes in 2016-17, up from 5.7 million tonnes in 2015-16, and 4.5 million tonnes in 2014-15.

If global markets get a sense that India’s imports may increase this year again, they may push up prices as the country is a key player in the import market.

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