Heatwave Drives Food Inflation, Cooling Product Sales; Dampens Travel Activity

The Bank of Baroda in a report has said that the severe heat across northern, central and eastern India has led to lower crop arrivals in affected states, likely resulting in prolonged food inflation. 

The report added that there is a temporary surge in demand for cooling products like ACs, air coolers, and refrigerators, with Q1 results expected to reflect this trend. Conversely, the travel sector has seen a slowdown as people prefer to stay indoors to avoid the extreme heat.

India is in the midst of a sweltering heatwave, which is the longest ever recorded in the country. While the onset of the monsoon has led to a fall in temperatures in some parts of the country, the northern part still awaits a meaningful respite from the heat spell.

Due to the ongoing heatwave, there has been an increase in both demand for FMCG items as well as durable goods, with major industry players betting on double-digit growth in sales. 

Prices of these products seem to be crawling up, even as early signs point to a ramp-up in production. Perhaps, the major impact of the ongoing heatwave will be felt on inflation amidst a sharp increase in prices of staple vegetables such as tomato, onion and potato. Due to the heatwave, production of these perishables has been impacted which is also reflected in lower mandi arrivals. 

As a result, prices of these commodities have seen a significant uptick which is expected to keep food inflation elevated in the near term.

Due to the severe heatwave in the country, power demand witnessed a sharp surge. There was a sharp pickup in electricity demand at 11.4 per cent between April to January 2024, compared with an increase of 1.1 per cent in the same period last year. Region-wise, electricity demand from the northern region rose steeply by 22.3 per cent compared with a decline of 6.2 per cent last year. 

Power demand in other regions also witnessed a significant uptick. Barring the southern and north-eastern regions, power demand in all other regions was higher compared to last year, the report added. 

Do Prices Reflect Any Impact Of Heatwave?

With increased interest in these items, we next attempt to assess whether there has been an increase in the prices. For this, we study the trend in inflation in some items of consumption and durable goods from the CPI basket. The caveat here is that supply-side issues as well as input prices also have an impact on prices. 

However, for our analysis, we assume that the increase in prices is demand-driven. The figure below gives the cumulative inflation in some of the items which are likely to see an increase in demand due to the heatwave. Among major FMCG items, the cumulative inflation rate in items such as ice cream, fruit juices and shakes does not provide a conclusive picture. For ice cream, the inflation rate is impacted by an elevated base. 

However, the inflation in this category is still above 4 per cent. 

To better assess this, we have used the seasonally adjusted series. For items such as ice cream generally the increased consumption during summer bumps up the prices. However, this year even adjusting for this seasonality, the sequential momentum is higher than last year, both in April 2024 as well as May 2024. 

A part of it can be attributed to rising milk prices, which in turn are impacted due to rising fodder prices on account of adverse weather conditions. 

Apart from ice cream, even the seasonally adjusted sequential momentum for fruit juices and shakes and refrigerators has seen a pickup, which was not visible in the cumulative data. However, prices of air conditioners/air coolers have shown momentum in terms of cumulative inflation, which is reflective of higher demand for these durable goods.

Heatwaves And vegetable Price Spiral

The vegetable price spiral is a seasonal thing during the summer months when the harvesting period nears its end. However, this year particularly, the TOP items which are tomato, onion and potato (TOP) have exhibited significant volatility, and the steepening of its trajectory intensified during the April to June period which coincided with heatwave alerts issued by IMD. Interestingly, the arrival of TOP has been impacted which is also reflected in their rising Mandi prices. 

State-wise arrival picture also corroborated with heatwave conditions. For example, states where heatwave conditions prevailed in pockets also witnessed sharp deceleration in the arrival of these vegetables, according to the BoB report.

The arrival data shows that both in the harvesting period and during the period of Apr-Jun when heatwave conditions aggravated, the arrival quantity of TOP has been impacted, showing a significant decline. The moderation in quantity was reflected in rising prices. 

For potato and onion, prices have risen considerably during the April to June period by over 80 per cent. For potatoes, most of the increase in prices was witnessed after the harvesting period when the arrival of fresh crops stopped.