The declining trend in food price inflation globally may not hold true for inflationary trends faced domestically due to a weakening Indian Rupee vis-a-vis the US Dollar. The recently released FAO Food Price Index (nominal) has shown a declining trend in July for the third consecutive month owing to lower international prices for grains, soy & palm oil, meat, dairy and sugar. (See links below) Based on FAO Food Price Index, the global rate of inflation in food in July 2013 (over July 2012) touched a negative 3.3 percent (see table 1).
But price situation at home is not rosy. Strictly speaking, the Wholesale Price Index (WPI) cannot be compared to the FAO Food Price Index. If the restriction is dropped, the rate of inflation in July 2013 (over July last year) in terms of WPI of food articles is found to be 11.9 percent (see table 2), much higher than what is computed from the FAO Food Price Index. The month-on-month annual inflation rate in vegetable and cereal prices stood at 46.6 percent and 17.7 percent, respectively, during July.
According to the RBI's Monthly Bulletin of August 2013, "recent currency depreciation and upward pressure on fuel prices due to geo-political uncertainties pose upside risks to inflation. Near double-digit consumer price inflation also remains a major concern". Brent crude oil spot price that was expected to average US$ 102 per barrel over the second half of 2013 rose to over US$ 108 in July 2013 due to the fear that political crisis in Egypt might spread to the rest of West Asia, thus, disrupting world crude supplies.
The RBI Monthly Bulletin has further cautioned that "given the increase in global crude oil prices and rupee depreciation in recent weeks, further increases in administered prices (of diesel and electricity) could become inevitable which could lead to higher inflation readings". The policy of reducing the under-recoveries of oil marketing companies-OMCs has proved to be quite expensive for the end consumers. The decision of Coal India to revise upwards the prices of coal from May 28, 2013 has compelled several State Electricity Boards (SEBs) to revise their prices upwards in May 2013. On top of it, many economists fear that the newly enacted Food Security legislation may put extra burden on the exchequer and cause inflation in the coming days.
Due to depreciation of the Indian Rupee vis-a-vis the US Dollar, the prices of imports (especially crude petroleum) have gone up, thereby, pushing up the cost of raw materials. Food prices too have skyrocketed since rising diesel prices (caused by revisions in administered prices by the Government) have affected transportation cost. Some economists have blamed the flood situation due to excessive rainfall for inflationary tendency that cut off many places from the rest of the country and damaged crops. Slow progress in infrastructure development (particularly highways) and their maintenance have taken a toll on our economy, blamed the Opposition.
According to the RBI Monthly Bulletin (August), average inflation during first Quarter (Q1) of 2013-14 at 4.8 per cent remained significantly lower than the average inflation of 7.5 percent during Q1 of 2012-13 and 7.4 per cent during the year 2012-13. Rural wages, which were growing at over 20 per cent (y-o-y) during 2010-12, grew at a slower pace during 2012-13, but still remain in the high double digits. A significant pick-up in rural inflation in recent months contributed to a faster decline in real wage growth.
(A note of caution about measuring inflation based on the WPI is that it may not indicate the current price scenario. WPI data becomes public after a lag of almost 2 months).