Food Prices Continue To Rise Despite Bumper Harvest

Despite bumper harvests, food inflation has boosted retail inflation to a five-month high, with food inflation rising 4.05 percent in December, the highest in three months and putting a strain on household budgets in a country where 800 million people or two-thirds rely on food subsidies. 

Decreased vegetable prices were more than compensated by costlier oils and fats owing to increasing worldwide edible oil prices. 

In December, inflation, as measured by the consumer price index, climbed to 5.6 percent year on year, up from 4.9 percent in November. Food costs make about half of the CPI basket and they rose 4.05 percent in December up from 1.87 percent the previous month. 

Inflation has a significant impact on the country's macroeconomic policies. Maintaining India's modest economic recovery is critical as the country confronts another wave of the epidemic, fueled by the highly transmissible Omicron form. 

Higher inflation, on the other hand, reduces the Reserve Bank of India's ability to maintain interest rates low in order to stimulate economy.

The current CPI is within the central bank's 6 percent comfort zone (4% plus or minus 2%) 

Despite signs of stabilization, edible oil prices continued to boost food prices, according to data released on Wednesday. While prices in certain food types fell, others soared considerably. Higher food prices have a greater impact on poorer households which spend a larger proportion of their monthly budgets on food. Overall, food costs fell month on month, led by vegetables, which fell 5.4 percent month on month.  This is rectifying the sharp rises seen in prior months as a result of unseasonal rainfall," said Sonal Varma, managing director and chief economist at Nomura Holdings. 

Other food categories, such as meat and fish, edible oils, fruits, pulses and sugar have also seen monthly price decreases.

However, despite the government claiming that cooking oil prices had stabilized, inflation in the oils and fats category increased by 24% year on year. Meat and fish rose nearly 5%. 

With a third wave of Covid under way, analysts expect supply pressures to tighten further. “(With) rising commodity prices and output prices, we expect inflation to rise to 6.0-6.5% in January,” Varma added.