Tomatoes, housewives and Raghuram Rajan
High inflation expectations show that consumers are not yet convinced the authorities are winning their war against inflation
Note to optimists: the battle against high retail inflation is far from over.
Vegetable prices have shot up in July over June. Economists at Nomura estimate that inflation in July will rise to 8.1% compared to 7.3% in June. That flies in the face of the more optimistic view that India is on the path of inevitable disinflation.
Such high-frequency price data on vegetables is one area of concern. The other is the latest numbers on inflation expectations released last week by the Reserve Bank of India. The median perception of current inflation among the surveyed households is 13.3%. They also expect retail inflation to be at 14% after three months and 15% after a year. These high inflation expectations do not reflect the decline in the headline number in recent weeks.
Why? One possibility is that consumers form their inflation expectations based on the price movements of commodities they buy frequently. Vegetables are one example. The price of onions—or tomatoes in July—is a conversation starter in most households across the country. The persistence of high inflation expectations shows that consumers are not yet convinced the authorities are winning their war against inflation.
But there is also some good news. The latest food price index calculated by the Food and Agriculture Organization for July shows that global food prices have declined for more months in a row now. The index value of 203.9 for July is actually lower than its value of 207.5 a year earlier.
Global food prices have been drifting downward but they have seen two significant jumps in the past decade. First, in 2007 and 2008, the years which saw food riots in several countries after exports were banned by some surplus agricultural nations. Second, in 2011, the year when protests against authoritarian regimes across North Africa and West Asia led to the Arab Spring.
The Indian central bank has done well to remain focused on inflation rather than obliging vocal special interest groups who want lower interest rates.
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