Global Economy

Vulnerability to climate change making food inflation structural: RBI economists



MUMBAI: Food inflation is generally considered to be out of the ambit of monetary policy, but if monsoon failures cause persistent food price shocks, rate actions are warranted to prevent inflation expectations from becoming un-anchored, Reserve Bank of India (RBI) economists wrote.

“Per contra, if monetary policy chooses to neglect a persistent food price shock, inflation expectations become unanchored, leading to generalised inflation,” wrote Deputy Governor Michael Patra along with central bank economists Joice John and Asish Thomas George in the RBI’s January Bulletin. The views expressed are personal.

Core inflation, a measure that strips away food and fuel, is generally considered to be more within the purview of the RBI’s monetary policy. The RBI raises or lowers interest rates to control inflation or spur economic growth by influencing aggregate demand conditions.

The rising vulnerability of food prices to climate change suggests that food inflation in India may be acquiring a structural character, the authors said, pointing out that the contribution of food to overall inflation rose to 67% in November 2023 from 48% in April 2022.

“Two types of shocks are experimented with: (i) transitory shocks from vegetable prices; and (ii) persistent shocks due to monsoon failures. Under (i), inflation falls, allowing monetary policy to see through the shock by not changing the policy rate,” the authors wrote.

If the RBI were to misjudge the shock to food inflation from vegetable prices and raise interest rates, it would impart volatility to economic growth without having any noticeable impact on inflation, the authors wrote.Over the past few months, volatile food prices have driven up headline Consumer Price Index inflation, with the price gauge printing at 5.69% in December, much higher than the RBI’s 4% target. After raising the repo rate by a cumulative 250 basis points from May 2022 to February 2023, the RBI has kept interest rates on hold since.With inflation in certain food sub-groups contributing excessively to volatility in headline inflation, large changes in food prices can affect headline inflation durably, they said.

Readers Also Like:  India's lab-grown diamonds may be 'value for money,' but natural diamonds won't lose their sparkle

Sub-groups like prepared meals, non-alcoholic beverages, milk, cereals, oils and fats, pulses and spices display higher degrees of persistence than other sub-groups like vegetables, the authors wrote. This reflects the influence of international developments and structural domestic supply bottlenecks.



READ SOURCE

This website uses cookies. By continuing to use this site, you accept our use of cookies.