Transient easing: On fuel taxes and prices

Cutting fuel taxes is a sure-shot way to address a major component of price pressures

September 16, 2021 12:02 am | Updated 11:57 am IST

The latest retail inflation data suggest, at first flush, that price pressures have begun to moderate in the economy, with the August print for CPI showing inflation having slowed for a second straight month to a 5.3% pace, after July’s 5.59%. Price trends among the constituents of the Consumer Price Index and the latest Wholesale Price Index-based inflation , however, show that it would be premature to drop the guard on price gains. For one, the year-earlier inflation reading was elevated thus imparting a favourable base effect. Month-on-month, however, the CPI nudged up 0.25% from July, belying the inference of softening inflation. And the pace of price gains in at least three essential food components speeded up from the preceding month, with meat and fish, dairy and oils and fats posting significant accelerations. Edible oils have been on a tear for months now — the August print was 33% after July’s 32.5% — and an earlier round of cuts in import duties have had little impact in cooling their prices, forcing the Centre to announce another tranche of duty reductions this month. Inflation in two other vital protein sources, eggs and pulses, also continued to remain a cause for concern. While inflation in eggs remained in the high teens at 16.3%, price increase in pulses was 8.81% after slowing 23 basis points from July’s 9.04% pace. A persistent and wider deflation in vegetable prices was the main positive contributor to the easing in overall food and beverages inflation last month.

The pace of inflation in fuel and light, clothing and footwear, health as well as household goods and services all ratcheted up last month. Transport and communication, which includes pump prices of the main automotive fuels of petrol and diesel, stayed stuck in double digits at 10.2% albeit after a 30 basis points easing from July’s 10.5% pace. And the WPI data show higher transportation costs combined with input price pressures fanned faster inflation in manufactured products as well, sending the segment’s pace to 11.4%, a fourth straight month of double-digit price gains. The outlook for inflation is far from sanguine if one considers that IHS Markit’s PMI survey for services revealed input costs rose in August at the fastest rate in four months, and a recent CII poll of CEOs showed a majority 67% expect average retail inflation this year to hover close to or exceed the RBI’s mandated monetary policy upper threshold of 6%. Policymakers are only too well aware that ultimately, inflation is not just about a point reading but far more about consumers’ and businesses’ expectations of the trend in prices. Fears of future high inflation dampen sentiment and thus retard economic activity. Cutting fuel taxes is a sure-shot way to address a major component of price pressures and it is time the Government bites the bullet and acts to provide a more abiding solution.

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