How is inflation 6-7% when veggies shot up 50-100%?

September 18, 2023

A simple Google search of “no tomato recipes” will show a variety of preparations without tomatoes. You could also find a lot of “no onion recipes.” People generally search for such recipes when tomato or onion prices shoot up.

Retail inflation was 7.4% in July 2023 and 6.8% in August 2023, mainly driven by food prices, especially vegetable prices.

Inflation is a major concern in most households. With their prices at unseen highs, tomatoes had become the poster child of inflation in July and August 2023. Tomato prices have eased since but are still higher than normal. Several times in the past, onion prices have also soared to “teary” levels.

Floods, droughts, non-seasonal rains, and insect attacks can hurt farm output. Covid and the Russia-Ukraine war also disrupted cultivation. Such forces create a mismatch in the demand and supply of food products, thereby causing their prices to shoot up.

Sometimes, hoarding can create artificial inflation in some products. Hoarding is an illegal practice of not selling a product despite having it in inventory. Sometimes, many traders do it together in a cartel. It is done to show artificial scarcity, which could cause a price rise.

Reported inflation represents a general increase in prices of goods and services.

The Consumer Price Index (CPI) is a basket of average goods and services people consume. The index assigns a weight to each constituent depending on how much an average consumer spends on it. Inflation is measured by the movement in this index.

This chart shows how the prices of tomatoes, onions, and potatoes see massive fluctuations, but the CPI is largely a stable, straight-looking line.

Source: India Data Hub

So, how much can tomatoes or onions really move the CPI?

The CPI includes food, clothing, education, transport, healthcare, personal care, etc.

Tomato and onion are critical vegetables, but vegetables make up only 6.04% of the CPI. So tomatoes/onions make perhaps less than 1% of the CPI.

To illustrate, let’s say a family makes ₹50000/month. Just like the CPI basket, they spend on food, clothing, housing, energy, etc. They consume 10 kilos of tomatoes in a month. At roughly ₹40/kilo, they spend ₹400 or 0.8% of their monthly income on tomatoes.

But at ₹150 per kilo now, they spend ₹1500. Their total expenses have risen by ₹1100, or 2.2% of their income.

So when you wonder how the reported inflation was 6-8% despite a four-fold increase in tomato prices, it is because the impact of tomatoes, or any other product, is limited to the extent of their weight in the index.

Read the Personal Finance module on Varsity as a guide to managing your finances.


Content, Zerodha Varsity

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