Disinflation facing resistance from Food Indflation

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.