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19th June 2024 (10 Topics)

Disinflation facing resistance from Food Indflation

Context

RBI Governor Shaktikanta Das recently addressed inflation trends in India, noting that while overall inflation is easing, food inflation remains a significant challenge.

What is disinflation?

  • Disinflation is the term used to describe a period of slowing inflation.
  • In contrast to inflation which refers to price direction, disinflation refers to the rate of inflation change. Disinflation is not problematic, and it is different from deflation.
  • Achieving disinflation is crucial for economic stability, as it helps maintain purchasing power and encourages investment.
  • Current Inflation Trends
    • Recent Figures: Retail inflation in May 2024 was at 4.75%, slightly down from 4.83% in April 2024, and lower than 4.31% in May 2023.
    • Core Inflation: Stood at 3% in May 2024.
    • Food Inflation: Remained high at 7.9% in May 2024.

Impact of Food Inflation on Disinflation

  • Resistance to Disinflation: High food inflation is slowing the disinflation process.
  • Supply-Side Factors: Weather conditions, including extreme heat, have affected the cultivation of pulses and vegetable production.
  • Average Food Inflation: Stood at around 8% over the past six to seven months.

RBI's Policy and Projections

  • Monetary Policy: The RBI’s Monetary Policy Committee has kept the repo rate unchanged at 6.5% due to food inflation concerns.
  • Future Policy Considerations
    • Policy Stance: Governor Das indicated it is premature to change the policy stance of withdrawal of accommodation.
    • Focus: The RBI aims to remain cautious and monitor inflation trends closely.
How Food Inflation Disrupts Disinflation?

India has been experiencing a slow pace of disinflation despite efforts to control inflation. A significant factor hindering this process is high food inflation.

  • Persistent High Food Prices
    • Food Inflation Rate: In May 2024, food inflation was at 7.9%, significantly higher than the overall inflation rate of 4.75%.
    • Sticky Prices: Food prices have remained persistently high, with an average food inflation rate of around 8% over the past six to seven months.
  • Supply-Side Constraints
    • Weather Impact: Extreme weather conditions, such as the intense heat experienced last summer, have negatively impacted the cultivation of pulses and vegetables.
    • Supply Disruptions: Adverse weather conditions lead to reduced agricultural output, causing supply shortages and driving up food prices.
Fact Box:
  • Inflation is a sustained increase in the price level of goods and services.
  • Disinflation is a decrease in the rate of inflation.
  • Deflation is a sustained decrease in the price level of goods and services.

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