Rising Temperatures: A New Predictor of Food Inflation in India, Says HSBC

Tracking rising temperatures is emerging as a more accurate way of predicting food inflation in India than the traditional reliance on rain patterns, according to a recent report by HSBC Holdings Plc. The report emphasizes the growing correlation between extreme heat and the prices of agricultural commodities, particularly perishable staples such as fruits and vegetables.

The Strengthening Link Between Temperature and Food Prices

Over the past decade, the relationship between extreme temperatures and the cost of perishable food items in India has intensified. HSBC’s report revealed that the correlation between temperature and food prices has surged to 60% in 2023, a significant increase from just 20% in 2014. This shift indicates that climate change and rising temperatures are having a profound impact on India’s food inflation, making it a critical factor for economic forecasting.

Impact on Inflation and RBI’s Monetary Policy

India has been grappling with inflation rates well above the Reserve Bank of India’s (RBI) 4% target, largely due to volatile food costs. The RBI has maintained its policy rate for the past year and a half in response to these inflationary pressures. HSBC’s report suggests that while consumer price gains may ease toward the end of the year as temperatures drop, the long-term trend of rising temperatures could pose significant challenges for managing inflation in the future.

Shifting Away from Traditional Forecasting Methods

Historically, economists have relied on rain patterns and reservoir levels to predict food inflation in India. However, HSBC’s analysts suggest that these methods may soon become obsolete. Improved irrigation systems have reduced the impact of insufficient rainfall on crop yields, but there is currently no effective solution to protect crops from extreme heat. This has led to a paradigm shift in how food inflation is forecasted, with a growing emphasis on temperature trends.

Long-Term Concerns for Inflation Management

HSBC’s report warns that rising temperatures could become a significant problem for inflation management in India over the medium term. As the effects of climate change become more pronounced, the traditional methods of predicting food inflation may no longer suffice, necessitating new approaches to economic forecasting and policy-making.