Food prices to stay sticky, may keep inflation around 7% in Q3 too

The poor are facing a higher inflation burden due to the surge in food prices, especially for items like cereals and vegetables, which are unlikely to cool off soon owing to unseasonal rainfall and lower Kharif crop sowing, according to economists.

Urban India’s poorest households – those in the bottom 20% income bracket – faced as much as 8.1% inflation in September, while those in the top 20% income segment experienced a far lower 7.2% inflation, Crisil Ratings estimated in a report on Thursday. Similarly, those in the lowest income bracket in rural areas faced 7.8% inflation last month, compared with 7.3% for the top 20% income households.

Food inflation soared to a 22-month high of 8.4% in September, lifting India’s retail inflation to a five-month high of 7.4%. Cereals inflation hit a 108-month high at 11.5%, mainly on account of wheat, which has clocked double-digit inflation since June and hit 17.4% in September, and rice – which surged to 9.2% from 6.9% in August. Vegetable inflation quickened to 18.1% last month from 13.3% in August.

“Essential items, such as food and fuel, occupy a greater share in the consumption basket of lower-income classes… Across rural and urban areas, the poor (bottom 20% income class) continued to face effectively higher inflation than their richer counterparts (top 20%), as inflation for food and fuel items remained higher than for core items,” Crisil economists pointed out.

SBI expects high cereal and vegetable prices to persist in view of the high unseasonal rains in cereal producing States and expects the higher food inflation to spur the overall inflation average in the October-December quarter to about 7% – compared with 6.5% projected by the Reserve Bank of India. Goldman Sachs also cautioned on upside risks to food inflation and said fuel inflation would rise in light of the recent increase in natural gas prices.