India’s retail inflation - Consumer Price Index (CPI) - slowed to a 16-month low of 4.06% in January 2021.
However, various factors make the inflation outlook for the coming months less encouraging, calling for a cautious approach.
What is the inflation scenario?
Inflation appears to have cooled after having stayed stubbornly stuck above the RBI’s upper tolerance threshold of 6% for six months through November 2020.
The latest retail inflation readings offer monetary authorities a fair amount of comfort.
What was the driving factor?
The deceleration was helped by an appreciable softening in food prices.
Specifically, the Consumer Food Price Index reflected a gain of a mere 1.89% in January 2021.
vegetable prices saw a disinflation of 15.8%
cereal prices eased considerably for a second month in the wake of kharif crop arrivals
The RBI in its recent monetary policy statement, cited the below as factors that augured well for the months ahead-
the bumper kharif crop
rising prospects of a good rabi harvest
larger winter arrivals of key vegetables
softer egg and poultry demand on avian flu fears
What is the need for caution though?
Food costs - The central bank was mindful of the risks too. This is especially with regard to food costs.
The latest data on this had brought to the fore concerns over the prices of pulses and edible oils.
While inflation in pulses and products was at 13.4%, that for oils and fats stood at 19.7%.
Eggs, and meat and fish, both posted double-digit rates of 12.9% and 12.5%, respectively.
Base effect - Inflation moderated by more than 100 basis points in February 2020 to 6.58% before slowing to 5.84% in March 2020.
This favourable base effect is also beginning to wane.
So, the outlook for the coming months is far from reassuring.
Input cost - Of particular worry is the trend in input costs for multiple sectors in the real economy, including manufacturing.
From automobile manufacturers to builders, rising raw material costs are beginning to force them to pass on the impact to the end consumers.
And this is going on when demand is yet to pick speed.
The latest Purchasing Managers’ Index (PMI) points to the sharpest increase in purchasing costs for more than 2 years.
This is because of the continuing supply-side squeeze.
The resulting inflationary pressures made manufacturers to raise their product prices at the fastest pace in over a year.
Fuel price – Adding to the above concerns is the rising transportation fuel prices to newer and newer record highs in recent days.
Diesel, the main fuel for freight carriage, has now exceeded Rs.80 per litre.
This is bound to feed into prices of almost everything being transported across distances.
With this, the outlook for inflation becomes distinctly darker.
Policymakers need to maintain a strict vigil to keep inflation from resurging and posing a threat to macro-economic stability.
