|Monday, 31 October 2011 00:00|
Another round of MSP hikes, food inflation soars
Although RBI has said it expects inflation to start trending down after a few months, to reach 7% by March, food price inflation is once again rising—from 10.6% on October 8 to 11.4% on October 15. Indeed, given the sharp hike in the minimum support price of various rabi crops—ranging from 15% to 38%—another round of high food inflation is on the cards. Analysis by Surjit Bhalla showed that for every 10% hike in MSPs, there was a 3% increase in the consumer price index. He also found that MSPs tended to rise faster in election years, so more hikes can be expected in the months ahead. While the large stocks of wheat have kept inflation low—prices fell in the last few months—pulses have seen a steady hike, the latest being 9% for the week ended October 15. MSPs for masur dal were raised 24.4%, suggesting a further round of price hikes here.
While hikes in MSP will fuel prices of staples in the weeks ahead, what's interesting is the trend in prices of high-value items like vegetables, eggs, meat and fish, fruits, milk, and pulses. While inflation rate of vegetables in the most recent week has touched a high of 25%, that of eggs, and meat and fish has moved up by 12.9%, fruits by 12% and milk by 10.9%. While there was a definite seasonality to vegetable prices in the past, recent trends show this has disappeared. In 2007-08, vegetable prices rose the fastest in Q1, they rose the fastest in Q3 the next year, in Q2 for 2009-10 and in Q4 for 2010-11. The current spiral is not related to potatoes or onions whose prices fell by 0.5% and 18.9% in recent weeks. Prices were driven up by peas, cabbage, lady finger and tomatoes—for the week ending October 15, prices of peas went up by 37%, cabbage by 46.2%, lady finger by 48.7% and tomatoes by an astounding 54.8%. If the government continues to come up with policies aimed at the next elections, RBI may have no option but to get back to rate hikes sooner rather than later.