Food inflation is impeding the alignment of headline inflation with its 4 per cent target in India and cannot be tolerated in setting monetary policy any longer, said RBI staffers in an article in the latest monthly bulletin.
“Monetary policy is the only active disinflationary agent in the economy. Going forward, therefore, if food price pressures persist and continue to spill over, a cautious monetary policy approach is warranted,” said RBI Deputy Governor MD Patra and two other officials, Joice John and Asish Thomas George, said in the article “Are Food Prices Spilling Over?”
They cautioned that if high food inflation persists, a more cautious monetary policy approach is warranted to squelch the propagation of food inflation pressures into a more generalised inflation.
The authors noted that high food inflation is seeping into households’ inflation perceptions and expectations.
This can potentially spill over into non-food prices as demand for higher wages on cost of living considerations and rising input costs are eventually passed on as higher output prices, especially in a scenario of strengthening aggregate demand.
As a result, there is a danger that the beneficial effects of lowering core inflation can be frittered away, with adverse implications for the disinflation process underway and policy credibility.
The authors observed that food price shocks have been imposing upside pressures on core inflation throughout these years, but this has been offset by disinflationary monetary policy.
“Should this disinflationary force recede, upward pressures on core and headline inflation could get magnified and may run out of control, especially with aggregate demand picking up alongside cost-push risks looming in the wake of geo-political tensions,” they said.
The authors opined that the conventional treatment of food price perturbations as transitory in the setting of monetary policy is increasingly becoming untenable.
“A large part of this increase in persistence is driven by the secular upward drift in food inflation expectations. Past high food inflation episodes – intrinsic persistence – have a bearing in shaping these expectations. The inelasticity of the demand for food to price shocks makes food inflation persistence all the more worrying,” they said.