Inflation conundrum

High price rise trends could continue in 2022, compounding the challenge for policy makers

January 19, 2022 12:02 am | Updated 12:02 am IST

While North Block mandarins seek to conjure up policy levers in the upcoming Budget to spur India’s fragmented economic recovery along, the latest official data suggest industrial output is stuttering with a meagre 1.4% growth in November. More worryingly, inflation is re-emerging as a threat — retail prices surged to a five-month high of 5.6% in December from 4.9% in November. While urban India continued to record a higher incidence of price rise at over 5.8%, inflation faced by rural consumers was at 5.36% — the steepest pace since July 2021. A dozen States clocked higher inflation than the headline 5.6% level, with half of them recording well over India’s stated inflation tolerance threshold of 6%, led by Haryana and Tamil Nadu with an over 6.6% print. While the CPI cooled month on month by about 0.35%, this was offset by low base effects that pushed up inflation in food and beverages, and higher clothing and footwear prices. The deferral of a higher GST on textiles, and softening food and vegetable prices this month, may help rein in some of these pressures, but there are other headwinds. Fuel prices moderated after excise duty cuts in November, but this may not sustain for long as average prices for India’s crude oil basket are now at around $84. For now, retail fuel prices have remained static, but this may have more to do with the unstated tendency of not effecting such hikes in the poll season. By Monday, yields on government bonds had hit a two-year high which could upset the fiscal math over time.

Inflation in wholesale prices offered little comfort in December even as it came off a record high of 14.2% in November to touch 13.6%, staying above double digits for the ninth successive month. Economists believe that the persistent gap between wholesale and retail inflation, now at eight percentage points, does not augur well for price stability ahead. Producers coping with high commodity prices and input costs will have to find ways to pass them on to consumers, feeding into retail inflation and squeezing household budgets further. For industry, inflation is as critical an obstacle to higher consumption and growth impulses as the new virus mutations and the third wave — which by itself is expected to further stoke retail prices. Consistently high inflation, as witnessed since the pandemic onset, constitutes not just a tax on the poor and the middle classes, but is also a potentially permanent wrecking ball for future spending capacity (and growth) amid a damaged job market. The Government, through its statement of intent in the Budget, and the RBI, which has noted that the waning of inflation spiralling across geographies may ‘take longer’ than expected and will review its monetary policy stance next month, need to communicate their inflation game plan to soothe expectations.

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