Executive Summary

Inflation has been the top most concern among the central banks and policy makers ever since the demand revival began after the Covid induced supply disruptions. Sharp rise in inflation is typically countered with heavy and successive doses of interest rate hikes which more often than not, have a long term impact on an economy’s growth potential. It is well known that food and fuel inflation are the major triggers for an inflationary upcycle which if prolonged, spills over to other goods and services and gets embedded at the core level. The inflation story in India has not been any different over the last three years which not only saw the prolonged disruption from the pandemic but also global geo political risks in the form of the Ukraine war. The average CPI inflation print over this period stood at 6.0%, just at the upper band of the target set for the Monetary Policy Committee of RBI.

An analysis of the longer term inflation trends in India highlights that the economy remains fairly vulnerable to food and fuel price shocks. A further deep dive into food inflation reveals the structural nature of inflation in animal protein categories, a trend that seems to have accelerated in the last three years with average inflation in meat, eggs and milk rising to 7.9%, 5.8% and 5.4% respectively. This article attempts to analyse the underlying reasons for such a consistent uptrend in prices and highlights the proactive measures that the Government needs to take to bridge the gradually increasing demand-supply gap in these food categories which in turn, will be critical to address the risks of persistence in India’s food inflation.

Suman Chowdhury
Chief Economist & Head of Research, Acuité Ratings & Research