Sustained high print of over 8.3% since July 2023 

Higher for Longer! Yes, it sounds familiar because that is what’s happening to interest rates around the globe. Has it started to happen a little more frequently for food inflation also in India? Well, we looked at the data for the last 10 yrs closely. We computed the rolling six month simple average of food inflation and also looked at the frequency with which it is exceeding 8% in every such six month and then plotted the data (refer to Chart 1). There are some interesting insights that we have drawn from that analysis.

The frequency and the duration for which food inflation stays elevated in India (>8%) appear to be increasing or in economists’ parlance, the stickiness is intensifying. Forget the Covid period where supply chain was severely disrupted but after Covid, we have subsequently witnessed two periods in 2022 and then again in 2023 where the food inflation print hovered at around or over 8.0% and which continues till today. The lowest level seen since July 2023 has been 8.3%!

While the El Nino phenomenon can be partly considered to be responsible for the current scenario, the increased frequency of adverse weather events and the frequent deviation from the normal spatial and temporal distribution of rainfall in India appear to be the key factor behind the “higher for longer” phenomenon in food inflation. In other words, higher climate risks is leading to higher stickiness of food inflation levels.

Another possible reason for the structural impact on food inflation can be the higher demand for certain food groups (milk and eggs for example) due to rising incomes and changes in food habits

Needless to say, the Govt has continued to take proactive steps to cool down the prices of several food items since the pandemic but such a task has become increasingly complex due to the spillover of such inflation across a larger number of food categories and the higher global volatility in agricultural output.

To conclude, persistence of high food inflation is “another elephant in the room” which will not be easy to drive away. An above normal monsoon (as forecast) in the current year can provide immediate relief but it is likely to remain in the backdrop of higher climate risks. Consequently, inflationary expectations may remain elevated and the headline print may not sustain around the median target level of MPC (4%) for a reasonably long period, complicating monetary policy decisions of RBI.

Chart 1: Rolling 6 Months Average Food Inflation(%), Persistence of >8% Inflation