What is the issue?
- 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.
Source: The Hindu
