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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:
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