News On Tomatoes, Onions And Potatoes Can Help Nowcast Food Inflation: RBI


Combining high-frequency information on prices with market intelligence on high impact food items helps nowcast food inflation and generate near-term inflation forecasts, according to a paper by the Reserve Bank of India.

Three key vegetables—tomatoes, onions and potatoes—with a combined weight of 2.2% in the consumer price index basket in India, contribute heavily to volatility in both food inflation and headline inflation, impacting the performance of nowcasts, the paper said.

These three main vegetables, produced and consumed widely in the country, form an integral part of the Indian diet, so much so that they are hard to substitute, according to the paper. However, the indispensable nature of these items gives rise to a major problem for households as well as for generating reliable inflation forecasts, which serve as the intermediate target for monetary policy under inflation targeting, it said.

High volatility in TOP prices, often caused by crop damages on account of excess or deficient rainfall and other events, lead to production shortfalls, pushing up food inflation as well as headline inflation.

Newspaper articles about crop damages, extreme weather events, pest attacks, trade restrictions, transporters’ strikes or other adverse events— which can have a significant impact on future prices—can provide useful additional information, according to the RBI study titled, ‘Forecasting Food Inflation Using News-based Sentiment Indicators’.

The sentiment associated with each article and the coverage frequency of these events can provide helpful information regarding such price shocks, the paper explained. This forward-looking information can be extracted and analysed using text mining analysis, it added.

For the construction of a news-based sentiment indicator, the authors Bhanu Pratap , Abhishek Ranjan, Vimal Kishore and Binod B. Bhoi developed a dataset of daily news items related to TOP commodities from nine leading English news dailies published from January 2011 to August 2021. The newspapers were selected based on their national coverage and reporting on events and issues related to agri-commodities.

A lexicon-based approach was used to match words or group of words occurring in a document with a pre-defined wordlist of positive and negative words. Scores were assigned to each matching word depending on whether its tonality is ‘positive’ or ‘negative’. The paper assumes that a positive sentiment score is indicative of an expected fall in the prices of the given commodity and vice versa.

As expected, the derived monthly net sentiment score of TOP and changes in their prices as reflected in CPI showcased an inverse relationship between them. Large increases in TOP prices seen after major supply shocks coincide with large fall in sentiment related to each of the three commodities, the paper found. Major price spikes observed in TOP in the recent past were often associated with supply shocks.

During the period of study, tomato prices have undergone four major price spikes while both onion and potato have seen five, the paper found. The major causes of these sharp spikes include farmers’ protests, blight disease in potato, speculative stock holding by traders, heatwave, and excess rains, but the major and recurring source is related to weather-related shocks. Unseasonal, excess or deficit rains affect the production of these perishable vegetables, the study found.

A skewed state-wise distribution of production indicates probable concentration of risk, emanating from adverse weather events or other supply shocks in these states, which could transmit to all over the country.

Price data by the Department of Consumer Affairs also provides a good indication of price movement of these items for the ongoing month as the data is released on a daily basis and can be used for nowcasting food inflation. But this data cannot be used for understanding the nature of price pressures, for which researchers often rely on news articles, announcements by ministry officials, information from traders and retailers and private agencies that track ground-level information for these commodities. This additional information on factors behind sudden price changes can be utilised to estimate the possible direction and duration of price shock and the magnitude of expected price changes, the paper explained.

Accuracy gains from incorporating daily news data in a mixed frequency setup are especially observed in case of near-term projections or ‘nowcast’ of inflation, it said.


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