Food inflation falls to a three-and-a-half-year-low of 6.6%

NEW DELHI: Food inflation dropped to almost a three-and-a-half-year-low of 6.6% for the week to November 26 as a good harvest drove down vegetable prices further, raising hopes that the stubborn inflation will finally ease.

Fruit and vegetables and items such as milk, meat and eggs have kept food inflation high, which in turn has kept the overall inflation at over 9% during the 11 months till November.

Food articles have a 14.3% weight in the wholesale price index.

"Inflation has slowed sharply this month and the trend looks favorable," said Taimur Baig and Kaushik Das of Deutsche Bank.

Food price have dropped nearly a percent from the week before when inflation stood at 8%, data released on Thursday showed.

The high base effect, 8.93% inflation a year ago, also contributed to the decline.

Economists expect this base effect and good farm season to drive down inflation further.

"There was an unseasonal spike in vegetable prices December 2010; accordingly, the base effect would help keep food inflation low in December 2011," said Aditi Nayar, economist with ICRA. She added that food inflation could fall to 3-5% during December.

Food prices had declined for the sixth week in a row. The sticky parts of food inflation, the protein rich products, have also shown a sequential decline.

"The recent decline in inflation is more than just a base effect. The sequential decline in the protein rich food is encouraging," said Jyotinder Kaur, economist with HDFC Bank, adding that increased supply may have helped.

Vegetable prices have declined by 5.28% taking inflation in vegetables at -1.25% for the week ended November 26.

Prices of egg, meat and fish also declined 1.3%, taking the inflation in the product category down to 10.04%.

The RBI had said that inflation would start falling from December onwards. Economists say the decline could start earlier as overall inflation is expected to drop to 9% in November.

"Given the substantial favorable base effect in food and primary articles next month, inflation could moderate further to 7.5% in December and then to 7% by end-March 2012," said Baig and Das.

The growth scare and the fall in inflation could increase the pressure on the RBI to reverse monetary tightening, but economist caution against any hurried move. "It would be premature for the RBI to reverse its monetary policy but we will definitely have a pause in the policy review on December 16," said Madan Sabnavis, chief economist, CARE Ratings.