"When production of food items is higher than last year and still prices rise, then it means that intermediaries are keeping the stock somewhere," Jaitley said at a conference on food inflation.
He said the test of the good governance is how to de-hoard the stock kept by intermediaries into the market to rein in prices. "This is the biggest challenge."
Stating that prices of some food items increase every year during the July-December period due to hoarding, Jaitley said, "There are reports of below normal monsoon this year. Hoarders are taking advantage of the situation."
"Prices of some items had touched Rs 70-100 per kg last year. Prices are still lower this year. There is no panic situation," he said.
The Minister asked the state governments to assess the problem as action taken after price rise creates panic in the market.
Noting that prices of crude oil have increased due to tension in Iraq, Jaitley said there are, however, indications of softening of prices.
He was addressing the conference of state food and consumer affairs ministers to discuss measures to check food inflation. The meeting was also attended by Food Minister Ram Vilas Paswan and Agriculture Minister Radha Mohan Singh.
Jaitley also mentioned that prices of onion, potato, rice, pulses and milk have increased because of different reasons.
Inflation rose to five-month high to 6.01 percent in May due to rise in prices of essential items like vegetables, fruits and cereals.
In order to check prices during the coming festival season, Jaitley urged the states to assess the supply-demand situation and take effective measures in advance to boost supply.
He also asked the state governments to set an example of good governance as there is no reason for price rise when production is at a record level and supplies are adequate.
Emphasising on the need for coordinated efforts to control prices, Jaitley said both the Centre and states should prepare a joint-action plan in this regard.
The Finance Minister highlighted measures taken by the Centre in the last few weeks including additional allocation of 5 million tonnes of rice for poor and imposition of minimum export price on onion and potato.