Data on Food Price Rigidities can serve as Inputs for RBI

Context: A new study shows variations in the price patterns of food items could guide the framing of monetary policy in India; three new external members have been introduced to the Monetary Policy Committee (MPC).

Responsibilities of the Reserve Bank of India (RBI): It has an official mandate to target consumer price inflation while also  - 

• Focus on economic growth.
• Improve policy transmission.
• Focus on volatile food prices.

Need for basing Inflation targeting on Headline Inflation: 

• Impact of households: Even when the headline inflation is considered volatile in nature due to the inclusion of food prices, it effects on family household’s budget justifies its importance.

• Nearly half of the Consumer Price Index (CPI) is made up of food prices.

• Easy Communication: It is also easier to communicate policies on a widely understood measure such as headline inflation rather than a more technical measure such as core inflation.

• Food economy quickly moves in response to changes in supply and demand: as against stagnant prices outside the food economy since increasing prices may not be economical for them.

• For, E.g. during  North Atlantic Financial crisis, food inflation quickly spread to the rest of the economy.

Case Study: Working Paper on Food Price Behaviour in India by RBI: 

• It covers weekly prices of 45 food items collected across 85 places in India for the period 2005-08, amounting to 1.3 million data points.

• Findings:

• Price behaviour of the Indian food basket has a lot of variation; the price of the median food item changes broadly 1.34 times a month.

• Vegetable prices change twice a month on average.
• Prices of eggs, meat and fish change once a month on average.
• Prices of cereals change once every three and a half months.

• The variation reflects differences in the underlying market structure, especially the bargaining power of food producers.

Conclusion: 

• On analyzing the study, it is seen that economists usually assume food prices are flexible and quickly respond to changes in supply and demand, while the prices in the rest of the economy are rigid.

• An updated monetary policy framework should aim to target core inflation along with headline inflation, taking away the asymmetry.