Flare-Up in Vegetable Prices Stalls Overall Disinflationary Trend

Flare-Up in Vegetable Prices Stalls Overall Disinflationary Trend

Sub: Eco

Sec: Inflation and Unemployment

• Consumer Price Inflation:
  • Consumer price inflation rose to 5.1% in June from 4.8% in May.
  • The increase in inflation was primarily due to a surge in vegetable prices.
  • The 28 basis points (bps) rise in inflation stemmed from a positive momentum of 133 bps, outweighing a favorable base effect of 106 bps.
• Factors Affecting Inflation:
• Food Inflation:
• Food inflation firmed up to 8.4% in June from 7.9% in May.
• The positive price momentum of 269 bps in food significantly contributed to the rise.
• Fuel Inflation:
• Fuel inflation saw a slight positive momentum of 6 bps.
• Deflation in LPG prices continued, while growth in kerosene and electricity prices moderated.
• Core Inflation:
• Core inflation saw a positive momentum of 12 bps.
• Vegetable Prices:
  • Vegetable prices continued to record a double-digit rise year-on-year (YoY).
  • The persistent rise in vegetable prices played a significant role in halting the disinflationary trend.
• Insights and Observations:
  • The view that food price shocks are transitory is not supported by the past year’s experience.
  • The past year’s prolonged food price shocks suggest that these shocks cannot be considered transitory.
  • Sporadic spikes in various vegetable prices have contributed to a persistent inflationary trend in the food category.
• Implications:
  • Food prices are dominating the behavior of headline inflation.
  • The gains achieved through the reduction of core and fuel inflation, facilitated by a combination of monetary policy and supply management, are being undermined by the surge in food prices.

Conclusion:

• The recent spike in vegetable prices has interrupted the overall disinflationary trend in the Indian economy.
• Despite efforts to control core and fuel inflation, food prices, particularly vegetables, have shown persistent and sporadic spikes, challenging the notion that food price shocks are merely transitory.
• This highlights the need for more robust measures to manage food price volatility and sustain the disinflationary momentum.

Inflation

Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power over time.

Core and Headline Inflation 

• Demand-Pull Inflation
  • Definition: Occurs when the demand for goods and services exceeds supply, leading to higher prices.
  • Causes: Increased consumer spending, government spending, or investment.
  • Example: An economic boom where consumers and businesses are spending more, driving up prices.
• Cost-Push Inflation
  • Definition: Happens when the costs of production increase, leading to higher prices for final goods and services.
  • Causes: Rising wages, increased prices for raw materials, and supply chain disruptions.
  • Example: A spike in oil prices leading to higher transportation and production costs.
• Hyperinflation
  • Definition: Extremely rapid and out-of-control inflation, often exceeding 50% per month.
  • Causes: Severe economic instability, excessive money supply, loss of confidence in the currency.
  • Example: Zimbabwe in the late 2000s, where inflation reached astronomical levels.
• Deflation
  • Definition: A decrease in the general price level of goods and services.
  • Actual decrease in price levels. Disinflation is still positive inflation, just at a slower pace.
  • Causes: Reduced consumer spending, lower demand, excess supply.
  • Example: The Great Depression in the 1930s, where prices fell significantly due to decreased demand.
• Stagflation
  • Definition: A situation where the economy experiences stagnant growth, high unemployment, and high inflation simultaneously.
  • Causes: Supply shocks, inappropriate monetary policies.
  • Example: The 1970s oil crisis, where oil prices soared, leading to high inflation and economic stagnation.
• Reflation
  • Definition: Measures taken by the government to increase inflation to counteract deflationary pressures.
  • Causes: Monetary policies like lowering interest rates, fiscal stimulus.
  • Example: Post-recession policies aimed at boosting economic activity and prices.
• Disinflation
  • Definition: Disinflation refers to a slowdown in the rate of inflation. In other words, it represents a decrease in the rate at which prices are rising.
  • Unlike deflation, which is a decrease in the general price level of goods and services, disinflation still involves increasing prices, but at a slower rate than before.