An increase in food inflation and a significant drop in fuel price deflation led to Wholesale Price Index (WPI) inflation coming in higher at 1.62% in June 2016 than 0.79% in the previous month, says India Ratings and Research (Ind-Ra). Food inflation rose to 8.18% in June from 7.88% in May and has nearly doubled from March 2016 (4.09%). Deflation in fuel prices moderated to 3.6% in June from 6.1% in the previous month. Like retail food inflation, cereals have emerged as a new driver of food inflation besides pulses and vegetables. Cereals inflation further firmed up to 6.3% in June from 4.6% in May 2016, which is a cause of worry.
Although monsoon is likely to be above normal this year, there was some delay in monsoon showers reaching many parts of the country. This delayed the sowing of the kharif crop. It is, however, difficult to say whether the escalation in cereals prices is a temporary response to this delayed sowing or there is something else that has led to the sudden spike in the prices of cereals. In either case, a close watch on the cereals prices is warranted and timely market intervention by the government could correct this, given the stock of cereals with the government.
Pulses prices moderated to 26.6% in June from 35.6% in the previous month. Pulses inflation averaged 42.1% during June 2015-May 2016. Although moderation in pulses inflation could bring some relief to upside pressures on food inflation, a significant fall in pulses prices is unlikely since prices are driven by the supply and demand gap rather than seasonal factors.
Fruit and vegetable prices rose sharply to 11% in June from 7.7% in May 2016, mainly led by vegetables. Vegetable prices rose to 16.9% and fruit prices increased to 6.0% in June 2016 from 12.9% and 3.8%, respectively, in the previous month. While the prices of high-value food items such as meat, eggs, and fish showed some moderation in June, milk price inflation which had averaged 2% since August 2015 rose to 3.2% in June 2016 (May 2016: 2.4%). Manufactured products inflation also increased to 1.2% in June from 0.9% in May 2016, primarily led by food products which reflect a feed through from the higher prices of cereals, pulses, fruits, and vegetables.
Unlike cereals, intervention by the government to effect a softening in the prices of pulses and vegetable is not possible. Management of food inflation will remain a challenge as price shocks emanating from the aberration in the prices of select agricultural commodities cannot be ruled out coupled with the demand -supply gap and inadequate agricultural supply chain infrastructure.
