Staying watchful: On inflation risks

Inflation risks undermining growth and macroeconomic stability

Updated - July 14, 2022 01:28 am IST

Published - July 14, 2022 12:20 am IST

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The concerted efforts made by the Reserve Bank and the Union government to contain inflation appear to be having some impact, albeit marginal, in slowing the pace of price gains, the latest retail inflation data show. Price gains as measured by the Consumer Price Index (CPI) eased almost imperceptibly to 7.01% in June, from May’s 7.04%, with food price inflation slowing by a distinct 22 basis points to 7.75%. Of the 12 items comprising the food and beverages basket — almost half the weight of the CPI — the prices of pulses and edible oils both shrank from a month earlier. Prices of the key cooking medium, which had been on a boil amid a supply shock (from Ukraine and Indonesia), have cooled, helped by import duty reductions. Year-on-year inflation in oils and fats decelerated last month by a whopping 390 basis points to 9.4%, with the index shrinking 0.7% on a sequential basis. And prices of pulses contracted both from a year earlier and the preceding month. The other major positive sign of a policy measure translating to softer prices was with transportation fuels. The Centre’s reduction of excise duty on petrol and diesel in May manifested in a significant easing in inflation in the transport and communication index: year-on-year, the rate slowed by 260 basis points to 6.9%, while sequentially it shrank by 120 basis points.

Still, it would be way too premature for policymakers to drop their guard. With nine of the 12 items in the food and beverages basket, representing almost 80% of the sub index and spanning cereals, milk and meat to vegetables, sugar and spices, experiencing sequential price gains, the Government would need to maintain vigil to ward off any build-up of inflationary pressures in consumers’ kitchens. Year-on-year inflation in cereals, meat and milk all accelerated in June from May’s pace, and price gains in vegetables still remained in double digits at 17.4%. The progress of monsoon rains give hope that the prices of farm produce may moderate in the coming months, provided the extreme rainfall and flooding seen in some States does not adversely hit crop growing regions. And while an appreciable softening in global crude oil prices in recent sessions offers some respite, the rupee’s sharp depreciation against the dollar means India will continue to face the spectre of ‘imported inflation’ as the bill for imports, including crude, keeps rising. The decision of the GST Council to raise tariffs on a range of goods including some items of mass consumption is also bound to add upward pressure on prices. Finance Minister Nirmala Sitharaman’s remarks on Tuesday reflect authorities’ recognition that any let up in the fight against inflation risks undermining growth and broader macroeconomic stability.

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