Apart from conveying his determination to bring inflation down to 4% as mandated by law, governor Shaktikanta Das’ couched message was that the urge to do anything with the existing inflation targeting would probably lead to frittering away the hard-fought gains on credibility of price stability. Going beyond his usual explanation of the growth and inflation assessment in the economy, he dwelt in length about the components of food inflation and the need to keep an eye on them and the broader aspects of why it was necessary to stick to it.
“First and foremost is the fact that our target is the headline inflation wherein food inflation has a weight of about 46%,” said Das. “With this high share of food in the consumption basket, food inflation pressures can’t be ignored. Further, the public at large understands inflation more in terms of food inflation than the other components.”
One can’t miss the message here.
The Economic Survey last month hinted that the legally mandated inflation targeting for the RBI should exclude food prices while setting monetary policy as it distorts agricultural markets. “India’s inflation targeting framework should consider targeting inflation, excluding food,” said the Economic Survey. “Higher food prices are, more often, not demand-induced but supply-induced. Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth.”Furthermore, there have been reports that the committee which is examining the components and weights for the consumer price index, is likely to reduce the weighting for food as the overall expenses on food basket are down considerably since the last data collection that happened more than a decade ago.While that may be the case for individuals’ overall expenses, food still affects considerably and what one pays for it impacts the overall belief of where price levels are headed in general.
Economists place higher weightage for inflation expectations which influence saving and consumption behaviour of people. In fact, the flexible inflation targeting framework is a product of the distortion of financial markets in 2013 that caused a macro economic crisis.
So much so that the governor’s statement contained at least 13 footnotes on inflation alone, including on the increase in prices of tomatoes, onions and potatoes.
Governor Das, without mentioning the most dreaded phrase in the context of inflation, ‘wage-price spiral,’ said it is only a matter of time before the food prices spill over to the rest of the economy. Remember the argument that the protein rich consumption of ‘meat and eggs’ is the cause of inflation and how it spread to other segments and went out of hand?
“Persistently high food inflation and unanchored inflation expectations-if they materialise-could lead to spillovers to core inflation through pick-up in wages on cost-of-living considerations,” said Das. This, in turn, could be passed on by firms in the form of higher prices for services as well as goods, especially in a scenario of strong aggregate demand. These behavioural changes can then result in overall inflation becoming sticky, even after food inflation recedes.”
Yes, the spending pattern and consumption pattern last recorded in FY11 needs to be revised to the new reality by the Central Statistical Organisation, but it need not be constructed with the RBI’s inflation targeting in mind. It is a hard-won stability that can’t be squandered.