India cereal inflation broad-based and worrying despite data discord: Economists

Inflation in the cereals category hit 16.12% in January compared to 13.79% in December, according to data released on Monday. Alongside cereals, rising prices of protein items like milk, eggs and meat pushed up food and beverages inflation to 6.2% in January from 4.6% a month ago.

Overall inflation rose to a three-month high of 6.52%, above the central bank’s comfort band of 2%-6%, raising the prospects of further interest rate hikes.

Besides their effect on rates, elevated food prices will be a burden in India’s rural areas, where disposable income is low and wage hikes have not kept pace with the rise in inflation.

“Higher inflation in more heavily weighted components such as staple cereals and proteins was worrying,” said Dhiraj Nim, an economist at ANZ Research.

DATA DISCREPANCY
Part of the sharp rise in cereal inflation last month, say economists, was due to data discrepancies.

Cereals, with a weight of 9.7% in the overall inflation index, consist of 20 sub-components. The discrepancy, economists say, may boil down to the different weights assigned to the price of grains distributed via the subsidised public distribution system (PDS) system and those sold outside it.

“The smaller rise suggested by sub-components appears to be due to a steep 21.6% month-on-month drop in the price of ‘rice by public distribution system’, and a 4.9% fall in ‘wheat by PDS,” Nomura economists Sonal Varma and Aurodeep Nandi said in a note.

“These falls could be due to the ending of the government’s free foodgrain scheme last December,” they added.

The broader cereals index does not capture this, economists argue.

“If the bottom-up estimates are right, then headline inflation is over-estimated by 0.23 percentage points, on our estimates, relative to the reported 6.52%,” Varma and Nandi said.

“If the top-down numbers are right, then the bottom-up numbers need to be revised higher.”

STILL WORRYING
Even so, inflation in the food category remains worrying.

“Other food items are also showing a pick-up in prices such as proteins (meat, fish, eggs and milk) and pulses, while vegetable prices continue to decline,” said Gaura Sen Gupta, an economist at IDFC First Bank Economics Research.

By weightage in the inflation index, 62% of the food and beverages basket is seeing inflation higher than 6%, Sen Gupta pointed out.

ANZ’s Nim said the persistently high wheat and rice prices – despite the government’s steps such as curbing wheat export – has led to inflation in items which use these as key inputs.

“The three-month moving average inflation rates for items like biscuits, bread, refined flour, and semolina have been substantially higher than their latest 3-year average inflation rates,” said Nim.

“Cereal inflation, in short, has become broad-based, which is concerning.”