Number Theory: Food inflation tests economic policy in 2024

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In 2016, India adopted an inflation targeting framework that entrusted the Reserve Bank of India (RBI) with managing the benchmark inflation rate, as measured by the Consumer Price Index (CPI). India’s inflation targeting law prescribes an inflation target of 4% with a range of two percentage points on either side. It states that RBI would be deemed to have failed in meeting this target if inflation stays below or above the 2%-6% range for three continuous quarters.

RBI’s Monetary Policy Committee has forecast a 5.7% inflation for the quarter ending December 2024. (AP Photo)

The first instance of RBI failing to keep inflation within the target band occurred in 2020 when the quarterly CPI stayed above the 6% mark for four consecutive quarters between March 2020 and December 2020. Those were exceptional circumstances because of the pandemic. Inflation stayed above the 6% mark once again between the quarters ending March 2022 and March 2023 and RBI had to send a written response to the finance ministry explaining its reasons for missing the target in November 2022. The contents of that note have not been made public.

Since then, RBI has been significantly hawkish on inflation, insisting that it settle at 4% rather than the target band of 2%-6%. What did 2024 bring on the inflation front for the Indian economy? Here are three charts that aim to answer this question.

Food inflation tests economic policy in 2024

• 
  Quarterly inflation has been falling continuously since September 2023 except in December 2024

  Had it not been for the months of October and November 2024, RBI would have already declared victory on the inflation front. Quarterly inflation fell for four consecutive quarters to reach 4.2% in September 2024 from a value of 6.4% in September 2023. However, this trend was broken by a spike in monthly inflation numbers for October and November 2024, which came in at 6.2% and 5.5% respectively. RBI’s Monetary Policy Committee (MPC) has forecast a 5.7% inflation for the quarter ending December 2024. Its full year forecast for 2024-25 is 4.8%.
• 
  While headline inflation is above the 4% target, inflation excluding food in 2024 is among the lowest ever

  This is among the most interesting aspects about inflation in 2024. While the headline CPI print stayed above the 4% mark in 9 out of 11 months of 2024 for which data is available, inflation excluding food was much lower than historical standards. In fact, if one were to rank monthly retail inflation excluding food from January 2012 onwards, the first monthly reading in the existing CPI series, then all of 2024 CPI excluding food inflation readings are in the lowest 13 in the 155 monthly data points available.
• 
  Vegetables were the biggest driver of food inflation in 2024

  Data shows this clearly. If one were to look at the contribution of each major subcategory to food inflation in every month in 2024, vegetables stand out as the biggest contributor in every month except in July. In three months, September, October and November 2024, the contribution of vegetables has been more than 50% to overall food inflation. It needs to be underlined that the vegetables category does not have the largest weight among major subcategories in the food basket of CPI. With a share of 6.04% in the CPI basket, vegetables are behind cereals and products and milk and products subcategories which have of 9.67% and 6.61% weightage respectively in the CPI Basket.
• These trends create a dilemma for monetary policy

  The fact that headline inflation has stayed above RBI’s target because of food (especially vegetable) prices rising at a faster pace even as non-food inflation has been among the lowest in the economy, creates a major policy dilemma for RBI. With the economy losing some growth momentum, the cost of keeping interest rates high has increased. And interest rates, anyway, can do very little as far as controlling food or vegetable prices is concerned.