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Are We Reading Too Much Into The Latest Inflation Data?

Inflation rate

Inflation data released yesterday by the National Statistical Office (NSO) showed that provisional retail inflation rate for the month of December 2019 has reached a five and a half year high of 7.4%. This figure, as per some news reports, was last seen in July 2014. Further, news stories are making a lot of noise on the 5.7% high inflation rates also seen in November 2019. Talks have started about urgent action from the government to address this challenge at the earliest. Further, claims of stagflation, or a condition of slow economic growth and high inflation, in the Indian economy have also started to surface. But is there really something needed to be done about it?

Core Inflation vs. Retail Inflation

Some ‘experts’ have started to say that India is an economy facing stagflation, citing the 7.4% inflation rate. However, amidst all the discussion, one tends to ignore the devil in the detail– this is retail or headline inflation, and not necessarily core inflation, that was reported in the media.

Core inflation measurement excludes transitory or temporary price volatility as in the case of some commodities such as food items, energy products etc. It reflects the inflation trend in an economy, and also provides insight on the overall price level of the economy. When taking this into consideration, core inflation for the month of December 2019 rose to 3.75% when compared to 3.50% for November 2019.

Just Keep Calm: Expert Advice

In fact, market experts are clearly shouting out to say that contrary to the noise, there is little need for a knee jerk reaction to address it. Sri Thiruvadanthai, Director of Research at the Jerome Levy Forecasting Centre, pulled out long term data on Consumer Price Index, to show that food prices are rising, but core inflation remains very much in control, and that everyone should “Just keep calm.”

Centre Proposes, State Disposes? Onion Prices Kept Artificially High

Retail inflation in high; however, this is because of the inclusion of items with volatile pricing trends such as fuel and food items. To keep a tab on the pricing of essential food items, the Central Statistical Organization (CSO) monitors prices of a large variety of data, indices on which are also reported with the CSO data. Scrutinizing the latest CPI data, one sees that the inflation rates have broadly seen only a marginal increase except for one outlier – vegetables. Even within vegetables, it is primarily onions that have caused the huge rise in the inflation index. This happens, since the methodology for determining the inflation indices as specified in the 2010 Manual on Consumer Price Index puts emphasis on the pricing of specific vegetables on which people usually incur maximum expenditure. This includes vegetables such as onions and tomatoes besides many others; however, the two mentioned do result in significant impacts on the overall index score generated for the vegetables.

Onion prices rose due to shortages, triggered by the damage from heavy and unseasonal rainfall and flooding in the onion growing regions of Telangana, Karnataka Maharashtra. The Central government has been trying hard to combat the problem of high onion prices to provide relief to the customers. The onions were to be channelled through the state governments, who had raised demands with the Centre in order to ease the pricing pressures within their domains.

However, it has faced challenges to its efforts. Yesterday, Union Minister of Consumer Affairs, Food and Public Distribution, Mr. Ram Vilas Paswan, in a press conference, highlighted that the Centre has imported over 18,000 tonnes of onions to help control surging prices, and is providing them at ₹22/kg. However, he pointed out that despite their best efforts, only 2,000 tonnes could be sold. Efforts on controlling onion prices have, in fact, been hampered by a tepid response from several state governments, who remain reluctant to buy the imported onions, and would rather wait on the fresh produce to reach the market. Several state governments have in fact backtracked on their original demand for imported onions.

All this is going on, even as onion prices continue to remain on the higher end. Analysis of onion price data for 13 January 2020 from the Ministry of Consumer Affairs, Food and Public Distribution website shows that as compared to the ₹22/kg from the centre, onion prices continue to hover over ₹63/kg on an average across India. Clearly, even as the Central government is working overtime to ensure an adequate supply of onions at reasonable prices, lack of cooperation from the state governments ensures that the onion prices remain high.

Source: Ministry of Consumer Affairs, Food and Public Distribution, 13 January 2020

Evidently, as the government is managing to keep core inflation well within control, it is evident that the unwillingness of state governments to ensure cheap onions to public that has caused spikes in the consumer price index.