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MOSL: ECOSCOPE- Is food inflation really so low? Comparison of daily food prices with CPI data

ECOSCOPE: Is food inflation really so low? Comparison of daily food prices with CPI data suggests uncomforting divergence

 

• Retail inflation based on the headline consumer price index (CPI) has averaged 3.6% in the past three years with the highest monthly reading coming in at 5.2%. The subdued retail inflation can be attributed to food items (with 39.1% weight), which witnessed an average inflation of only ~1.5% during the corresponding period. This trend has continued unabated in 1HCY19. However, a comparison of food inflation in the CPI basket with that of food prices published by the Department of Consumer Affairs (DCA) on daily basis suggests massive divergence for the first time since 2013. While food inflation in CPI stood at 2.3% YoY in Jun’19 and averaged 0.4% in 1HCY19, daily prices suggest food inflation of ~8% YoY in May-June 2019 and an average inflation of 4.4% in 1HCY19.
• Further details suggest that ‘cereals’ and ‘vegetables’ explain most of the divergence between the two sources of food inflation, while inflation in ‘pulses’, ‘eggs’, ‘oil & fats’, ‘sugar’ and ‘meat & fish’ is similar. The divergence is most prominent in ‘rice’ among cereals; while non-primary items such as brinjal, garlic, green chilly and cauliflower account for it among vegetables. Inflation in major vegetables like potato, tomato and onion are in line with each other.
• Notwithstanding these perplexing developments, we RBI to cut policy rates one more time in Oct’19 supported by subdued inflation and even weaker growth in . However, such sudden and major divergence between two sources of food inflation is a concern and worthy of attention. In case, food inflation is 7-8% instead of the reported 2.3%, the headline inflation would be under-reported by as much as 2pp. If so, the case for further monetary easing will weaken substantially, and thus, this matter needs careful scrutiny.