Concerns about milk prices refuse to go away: Rising vegetable prices may counteract fall in food inflation

Inflationary pressures may be subsiding with the wholesale price index based inflation entering the deflationary zone, but rising prices of fruits and vegetables due to the onset of summer could still leave households spending more on food items.

Retail prices of vegetables have remained in deflation and fell 6.5% in April 2023 on a year-on-year basis as against a sharper 8.51% decline in March.

Retail inflation in fruits too has been volatile, but was at 2.09% in April, down from 7.55% in March.

However, headline consumer price index-based inflation moderated significantly in the month to 4.7% in April from 5.66% in March. Food inflation also halved to 4.2% in April, the lowest in 17 months, from a peak of 8.4% in September 2022.

Experts point out that prices of fruits and vegetables are the most volatile to weather shocks and tend to rise in summer months, but this year a rise in their prices has been delayed due to the unseasonal rains in March and April. But given the relatively small weight of these items in the overall CPI basket, with vegetables at about 6% and fruits at 2.88%, as compared to the 9.7% for “cereals and products”, the impact on overall inflation trajectory tort will be limited.

However, it will still be a concern for households that have been grappling with higher food prices for a while now, and especially those in the low-income segment, where food has a higher share in the consumption basket.

Moreover, retail inflation in milk and milk products eased in April but remained high at 8.85%. Prices of milk and milk products may continue to be elevated till the start of winter months, given the decline in domestic production. In the coming months, the waning of favourable base too would exert an upward pressure on overall retail well as food inflation.

Of course, a favourable base effect may keep the headline number low, but the index would continue to rise on a month on month basis.

Rahul Bajoria, MD and Head of EM Asia (ex-China) Economics, Barclays said that perishable food inflation is gradually turning up again and is no longer driving down food inflation. “In the past three months, perishable food prices have risen 2.5% after having fallen by 4.5% over the prior three months; non-perishable food prices have fallen by 0.3% in the same period, compared with a 1.6% increase in the prior period,” he said in a recent note.

While the increase in perishables inflation has been softer than is typical for the period starting March, we expect it to rise further and the divergence between perishables and non-perishables to widen as the usual summer seasonality for food prices begins, he further said.

Barclays expects headline inflation to average 4.7% in FY2023-24, though it expects it to rise modestly in the second half of the fiscal to 5% from 4.4% in the first half. “We think the risks to our forecasts are balanced for this fiscal year, with the potential for higher food prices in H2 mitigated by lower energy costs in H1,” Bajoria said.

Yuvika Singhal, economist, QuantEco Research, said, “It is still early days but the summer seasonality for perishables seems to be at play once again. High frequency mandi data till mid-May reveals that price momentum for most vegetables is running at a higher pace than April. While there is a growing comfort on the headline CPI inflation and food inflation numbers due to a sizeable correction in prices of cereals and oil seeds and a favourable base, the still broad-based nature of price pressures within food basket remains a concern. The impact of the El Nino will also have to be monitored and we await the IMD’s second long range monsoon forecast.”

A report by QuantEco Research highlighted that the food and beverages index clocked an increase in the Advance to Decline (A-D) ratio in April 2023 to 2.4 from 1.7 in March 2023. “What this mean is that for every item within food and beverages whose price eased, there were more than twice the number of items for whom prices increased,” it said, adding that this implies that the moderation in headline notwithstanding, price pressures within the food basket continue to remain broad-based. All other categories registered a moderation in A-D ratio last month.

While wholesale price index inflation is not tracked for monetary policy, it is seen as a leading indicator of retail inflation. The deflationary trend in vegetables is receding even in wholesale prices, which was at -1.5% in April as against -2.22% in March.

Apart from vegetables and fruits, price pressures also remain in other food items such as milk and milk products as well as cereals and pulses and the impact of the El Nino and the monsoon would impact prices of kharif output.

Wheat and rice prices rose by 15.46% and 11.37% in April on year against an increase of 25.05% and 10.51% respectively in January, 2023. However, these are expected to soften in the next couple of months due to uptake in wheat and rice procurement which has given a boost to the government stocks.