The vegetable price challenge to easing of retail inflation

The vegetable price challenge to easing of retail inflation

Subject :Economy

Section: Inflation

Context:  Food, veg prices may keep retail inflation above 5% for rest of FY 23-24

Key Points:

• Rising prices of vegetables — specifically tomato, onion and potato, known as the ‘TOP’ grouping along with other factors may put an obstacle to easing of retail inflation based on the Consumer Price Index (CPI) for June.
• The ‘TOP’ vegetables have a combined weight of 2.2 per cent in headline index (CPI-Combined) and 36.5 per cent in the CPI-Vegetables basket (6.04 % out of total 45.86 % weight).
• Vegetables with a weight of 13.2 per cent in the CPI-Food and beverages baskets have historically been one of the major drivers of food inflation, with Food and Beverage itself having a significant weight at 45.86 per cent in the CPI-combined.
• Why the huge impact on volatility of inflation ?
  • The volatility of headline inflation is significantly influenced by tomato, onion, and potato (TOP), despite their relatively small representation in the Consumer Price Index Combined (CPI-C) basket.
  • These vegetables contribute to the overall instability of inflation due to their perishability and susceptibility to weather-related disturbances.
  • Their demand is less elastic (items for which demand does not change much with a price change are less elastic), making them essential commodities for Indian households.
• Why the sudden surge in prices of veggies?
  • The recent increase in vegetable prices can be attributed to factors such as unseasonal rains, crop damage, and supply chain challenges faced by growers.
• Impact of the rise in vegetable inflation?
  • This price rise and its impact on inflation will have a cascading effect. It will lead to reduced purchasing power, changes in consumption patterns, and higher production costs, affecting both businesses and individuals.
  • The substantial price fluctuations not only affect the domestic market but also impact market segments reliant on agricultural exports.
  • As inflation rises and household budgets are affected, overall consumer sentiment may be impacted.
  • People will have less disposable income (economic definition: income left after deduction of tax; general meaning: money left after meeting the essential needs) for purchasing durable goods or spending on services like short leisure travel.
  • This could result in a decline in consumer spending, ultimately hampering economic growth.
  • Additionally, businesses utilizing vegetables in their production processes may experience increased production costs, potentially leading to future price hikes for goods and further reducing consumer spending.
  • Further wages will also increase to meet increased prices if price levels are sustained. Thus completing the ‘wage-price spiral’.