Surge in vegetable prices may halt easing of retail inflation

Surging prices of vegetables — specifically tomato, onion and potato, known as the ‘TOP’ grouping — along with other factors may put a brake on the easing of retail inflation based on the Consumer Price Index (CPI) for June. It could simultaneously have a cascading effect on inflation in the following three months — July, August and September. The Statistics Ministry will release the data for retail inflation on Wednesday.

The ‘TOP’ vegetables have a combined weight of 2.2 per cent in headline index (CPI-Combined) and 36.5 per cent in the CPI-Vegetables basket. Vegetables with a weight of 13.2 per cent in the CPI-Food and beverages baskets have historically been one of the major drivers of food inflation, a study published by the Development Research Group (DRG) of Reserve Bank of India last week shows.

A quick survey of economists estimated a June print of 4.5-4.7 per cent as against 4.3 per cent for May. Retail inflation has been on the decline since February, which prompted an expectation of a return to the median rate of 4 per cent. However, the rising prices of vegetables, continuous double-digit retail inflation of cereals, along with some contribution from pulses are likely to impact not just the June number but at least one of the subsequent three months (July-September-October) as well.

The DRG study report, authored by Puja Padhi, Himani Shekhar and Akanksha Handa, said: “Despite making up a small portion of the Consumer Price Index Combined (CPI-C) basket, tomato, onion, and potato (TOP) is a major contributor to the volatility of headline inflation.” It added that volatility in vegetable prices may be generally high due to their perishability and vulnerability to weather-related disturbances on the back of less elastic demand, as these are key vegetables for Indian households. 

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Meanwhile, experts believe that the rise in prices and consequent impact on inflation will have a cascading impact. Sarvjeet Virk, Co-founder and MD, FINVASIA, said: “The impact could soon be felt through decreased purchasing power, altered consumption patterns, and increased production costs, thereby affecting businesses and individuals alike. Such a large price variation not only affects the domestic market, but also the market segments that rely on exports of agricultural produce.”

Echoing this, Tushar Trivedi, Head of Farm Business, nurture.farm, said the rise in the prices of vegetables in the last two months is due to unseasonal rains, crop damage, and the niggles/challenges growers face in the supply-chain phase. “If prices don’t come down, it could lead to higher inflation rates for July. Higher inflation could lead to reduced purchasing power, affecting consumer spending patterns, and may lead to a tighter monetary policy,” he said, adding that he expected prices to come down during August.

Rising inflation and the consequent impact on household budgets could also affect overall consumer sentiment as people will have less disposable money to buy durables or spend on services such as short leisure travel.  Shailendra Singh, MD and Founder, Creduce, said the increased spending on vegetables may result in decreased household spending.

“Consumer spending could decline, hurting economic growth. Costs of business production would increase. Prices of vegetables could drive up production costs for businesses that use them. This could result in future price increases for items, cutting consumer spending,” he said.