Reading the Inflation levels

26 Nov 2022 Reading the Inflation levels

Significance for Prelims: Inflation trajectory 

Significance for Mains: Recent issues associated with emerging inflation.

News: Over the past several months there is concern over the trajectory of inflation. Recent data indicates that retail inflation has peaked and is now likely to trend downwards. The RBI anticipates that inflation would gradually decrease from a third-quarter high of 6.5% to a fourth-quarter low of 5.8% and subsequently the first-quarter low of 5% in the following fiscal year (2023-24).

Emerging trends give mixed signals about inflation trajectory: Latest data provides useful information about price trends in the economy while challenging some widely held conceptions about inflation. 

• Sharp rise in commodity prices is mostly due to the Russia-Ukraine war: The war pushes this year’s inflation beyond the upper threshold of the RBI’s inflation-targeting framework. For example, rise in the import price of India’s crude oil from $84.67 per barrel in January to $112.87 in March, and further to $116.01 in June.
• Decline in commodity prices does not lead to moderation in core inflation: Indian economy felt the ripple effect of high commodity prices but a decline in commodity prices does not lead to moderation in core inflation. Example: India’s crude oil import basket price has fallen to $92/barrel in November but during the same period core inflation has edged upward. 
• Conflicting inflation trends: Earlier economists held hostilities in Ukraine responsible for inflation, but when the decline in commodity prices does not lead to moderation in core inflation, the impact of the Ukrainian war on the economy is overhyped. Example: In recent months core inflation has firmed up from 6.1 per cent in June to around 6.6 per cent in October.
• Generalised nature of inflation across formal and informal segments of the economy. Inflation in the highly fragmented clothing and footwear industry has averaged 9.7 per cent over the past eight months (March-October), up from 7.7 per cent in the eight months before that. The industry has the presence of both formal and informal segments. 
• Indication from rental inflation: This category has the highest individual item-wise weight in the inflation index, so even a small movement in either direction, would have a large impact on core inflation.  In India, rental inflation generally remained range-bound over the last few years. But, there has been a steady uptick over the past five months in rental inflation it may be a one-time correction after the pandemic. As landlords would now be adjusting for lost time during the pandemic. So, they are raising the rent now. 
• Even after normalised activities, there is no pick-up in services inflation: Supply-side disruptions during the pandemic led to rising in goods inflation. But, services inflation remained relatively muted due to risk-averse consumer behaviours and restrictions on high-contact intensive sectors. The recent data indicates that there is no strong pick-up in services inflation even after expectation.  
• Due to a combination of lower cost-push pressures, slacker and fewer demand services inflation remain considerably lower than goods inflation.
• Corporate firm margins come under pressure: Recovery of the non-corporate sector after the pandemic enhanced competition that limits the corporate pricing power. According to a recent Crisil report, almost all the formal MSMEs will recover to their pre-pandemic level of revenue by this year. But, it is difficult to gauge the recovery of informal MSMEs. 
• Current spurt in inflation may not lead to a wage-price spiral: As unlike the US where inflation co-exists with tight labour conditions, price pressures in India coexist with weak labour market conditions. Inflation in India is not due to a strong economy. Wage growth has been lower than inflation in the informal rural economy. 
• Continuing slack in urban labour markets: The decline in Labour force participation rates suggests the decline in the bargaining power of skill-intensive segments of the urban formal labour force. 

Conclusion: RBI may continue to underestimate the price pressures in the economy as in the past due to forecasting errors. Inflation may have peaked, but it is far from being quashed.

Further readings:

1. Core Inflation
2. Monetary Policy Committee

Source: The Indian Express

Article: Reading the Inflation Tea Levels( Ishan Bakshi)

Article Link: https://indianexpress.com/article/opinion/columns/india-inflation-rate-economy-trade-data-8286250/

Yojna IAS Daily current affairs eng med 26th November

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