Growing price pressures: On need to tame inflation

Policymakers need to tame inflation or risk it undermining the growth they are supporting

March 16, 2022 12:40 am | Updated 12:07 pm IST

Inflation in India continues on a worrying uptrend with the consumer price index-based reading accelerating to an eight-month high of 6.07% last month, while wholesale prices logged a double-digit increase for the eleventh straight month. February’s headline WPI inflation spurted to 13.11%. Retail inflation remained stuck above the RBI’s upper tolerance threshold of 6% for the second month, as food price inflation quickened to 5.85%. Households in the hinterland bore a bigger brunt of the burden as price gains measured by the consumer food price index for rural areas surged by 69 basis points from January’s level, to 5.87%. Price gains in the key protein source of meat and fish jumped by almost 200 basis points from the preceding month to 7.45%, while nutrient-rich vegetables also logged inflation of 6.13% in February, belying the central bank’s prognostication last month of an “expected easing of vegetable prices on fresh winter crop arrivals”. And even though inflation in oils and fats eased by more than 220 basis points to 16.44%, there is little room for cheer, given that one can expect a spike again this month in the wake of the abrupt disruption in the supply of edible oils from war-torn Ukraine, which is the largest source of sunflower oil imported into India. With price gains in clothing and footwear, fuel and light and transport and communication all running well above 8% levels, the overall trend in retail inflation is now clearly broad-based across consumption categories and disconcertingly way above tolerance levels.

Also, with the pump prices of fuels yet to reflect the recent upsurge in international oil prices in the wake of Russia’s invasion of its southwestern neighbour, transport and communication inflation is certain to climb sharply once state-run refiners reset prices to reflect crude costs. The price of India’s crude basket had already risen by over $20 a barrel since December to $94.07 last month and with global crude prices currently in uncharted territory on account of the war, and the rupee having weakened by about 2.5% against the dollar since the start of the conflict, it is hard to see any near-term relief on the fuel price front. A glance at last month’s producer prices of the energy basket shows inflation in the fuel and power category of the wholesale price index was at 31.5%. And in a sign that manufacturers are no longer able to keep absorbing cost pressures, inflation in manufactured products accelerated to 9.84% presaging more pain for consumers. RBI Deputy Governor Michael D. Patra had last week cited the headroom available for the Government to cut taxes on fuels as a source of comfort on the inflation front. With the RBI’s latest consumer confidence survey showing most households reporting further increases in overall spending on essentials and remaining far from sanguine on the prices outlook, policymakers need to act expeditiously to tame inflation or risk it undermining the very growth they are currently focused on supporting.

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