Since the lockdown, wholesale and retail food prices seem to have snapped a connection, giving the central bank much to chew on ahead of its August policy meet.
Quick bites
Divergence in wholesale and consumer price indices (WPI and CPI) for food implies: end consumers face high food prices but its benefits are not percolating to producers
The divergence varies across food categories – wholesale prices of non-perishables such as cereals and pulses did not collapse, but those of perishables such as vegetables and eggs did
Given food has ~40% weight in the CPI, high retail food inflation leaves a large footprint on the headline inflation which the central bank targets – but it also has to address the larger predicament of growth
What’s the dichotomy about?
Among the myriad things the Covid-19 pandemic-led lockdown decoupled, the food inflation graph of the Indian economy was one.
In the first three months of this calendar year, both CPI and WPI food inflation were merrily travelling along a synchronous downward trajectory.
Then bam! came the pandemic and nationwide lockdown in March 2020. The WPI and CPI food inflation parted ways. The former softened from 4.6% in March to 3.8% in April – the first full month of lockdown. On the contrary, the latter firmed up from 8.8% to 10.5%. The gap between the two further widened in May.
Unlock 1.0, initiated from June, narrowed it a bit. But a wide margin persists.
What gives? One reason for the rise in retail food prices could be the supply disruptions and hindrance to movement of food items from mandis to retail markets due to lack of local transportation. It is also plausible that retailers cashed in on the situation, milking their customers.
On the other side, wholesale markets - facing temporary closures and labour shortages – were barely able to function, forcing farmers in distress sales, as farmers, who had loaded their trucks and driven to the mandis, had little choice but tos ell at the available price1.
So while the end-consumer continued to pay high prices, it did not benefit the farmer, and WPI food inflation continued to fall (WPI being a good proxy for what the farmer gets).
