Two reasons why food inflation may soften in the months ahead

Two reasons why food inflation may soften in the months ahead

Subject: Economy

Section: Inflation

Context:

• The Reserve Bank of India’s Monetary Policy Committee (MPC) noted how food price pressures have been interrupting the ongoing disinflation process, posing challenges for the final descent of inflation to the target [of 4%].

More on news:

• At 8.7% in February, retail food inflation stood above the overall year-on-year consumer price increase of 5.1%.

The drivers for this are primarily two:

• The first is international prices
  • The United Nations’ Food and Agriculture Organization’s food price index averaged 118.3 points in March 2024. 
  • A 7.7% drop from a year ago and 26.2% lower than the all-time high of 160.3 points touched in March 2022, just immediately after Russia’s invasion of Ukraine.
  • The index – a weighted average of the world prices of a basket of food commodities over a base period value (taken at 100 for 2014-16) – had fallen for seven months in a row, from July 2023 to February 2024, before edging up in March.
  • The above rise has been mainly courtesy of the index for vegetable oils registering a jump from 120.9 points to 130.6 points.
  • The cereal price index, on the other hand, has continued its declining trajectory. 

• • Easing global food prices – a result of bumper harvests in key producing countries and supply lines being restored post the Covid and Ukraine War-induced disruptions – make imports more feasible.
  • For wheat, the estimated stocks of about 7.6 million tonnes (mt) on April 1 were at a 16-year-low and precariously close to the minimum buffer norm of 7.46 mt for this date.
  • The primary reason for that has been the delayed onset of winter this time.
  • Above-normal temperatures in November-December are said to have caused premature initiation of flowering and cut short the crop’s vegetative growth phase in many parts of central India.
• The second driver is a possible La Niña
  • India’s pulses imports were valued at $3.17 billion during April-February 2023-24, over 80% up from the $1.76 billion for the corresponding 11 months of 2022-23. 

• • The above surge in imports was attributable to El Niño i.e. the abnormal warming of the central and eastern equatorial Pacific Ocean waters towards Ecuador and Peru, generally known to suppress rain in India.
  • 2023 did see patchy southwest monsoon (June-September) rainfall, extending to the succeeding northeast (October-December) and winter (January-February) seasons as well.
  • The brunt of dry weather was borne by Karnataka and Maharashtra, which are also major pulses-growing states.
  • The Union Agriculture Ministry has estimated the country’s pulses output to have dipped to 23.4 mt in 2023-24, from 26.1 mt and 27.3 mt in the preceding two years.
  • Imports – especially of red lentil (masoor), arhar (pigeon pea) and yellow/white peas (matar) – have kept a lid on prices.
  • This is unlike with vegetable oils (minus 14%), where the disinflation has come largely on the back of a global price crash and three years of record imports (chart 3).

The good news is that El Niño is weakening. 

• The latest three-month-running Oceanic Niño Index (ONI) – which measures the average sea surface temperature deviation from the normal in the east-central equatorial Pacific region – for January-March 2024 was 1.5 degrees Celsius.
• Given the past association of La Niña with surplus rainfall in India and these conditions expected to set in by the second half of the southwest monsoon season  it raises hopes of a bountiful agricultural year in 2024-25.
• To the extent that helps mitigate food inflation pressures, it would be manna from heaven for the government to take charge after the Lok Sabha election results in June 2024.