From dairy to motor fuel, how rising prices of essentials may push inflation up to 7.5% in April

Rise in input costs and increase in energy tariffs are one of the drivers of food and fuel inflation in the country, Barclays said.

CPI inflation, RBI rate hike
Barclays said CPI inflation could spike to 7.5% in April.

From cooking fuel to motor fuel, and from edible oils to dairy products, the length and breadth of everyday essential products are witnessing an increase in prices. This uptick could further aggravate inflation readings for the month of April, according to Barclays. CPI (Consumer Price Index) inflation is expected to breach Reserve Bank of India’s upper tolerance limit for the fourth straight month and inflate to 7.5 per cent or upwards, Barclays added. The government is expected to release CPI inflation readings for April this week.

Apart from higher inflation in food and fuel basket (ie, of items such as meat, fruit, cooking oil, motor and cooking fuels), core inflation may also rise further, continuing its trend observed over the past few months, Barclays said in a note last week. “We expect the persistence of inflation at elevated levels to prompt the monetary policy committee to undertake another 50 basis points hike in repo rate in June,” it added. Barclays expects food inflation to rise to 7.8% per cent in April, the highest print in 17 months.

What is driving up the prices?

Rise in input costs and increase in energy tariffs are one of the drivers of food and fuel inflation in the country, Barclays said. “Despite prices of several key items like some vegetables and pulses moderating, this was likely offset by further rises in the prices of cereals, meat and fruits in April. Higher feed costs are also likely pushing up the prices of chicken and milk. Unsurprisingly, a lot of the sequential increases are likely being driven by edible oil prices, which continued to trend higher in April, and are set to rise further in May given Indonesia’s recent ban on edible oil exports,” Barclays said.

“At the same time, both cooking gas and kerosene prices increased sharply in April. Revisions in electricity tariffs also likely pushed up power costs in some states, though a planned reduction in tariffs in Punjab should provide some relief in coming months . We expect this trend to continue through the year, as many state governments implement proposed power price revisions to support the distribution companies, under the union government’s reform directive,” it added.

RBI rate hike action based on high inflation

Last week, in an off-cycle monetary policy announcement, the RBI hiked repo rate by 40 basis points citing high inflation amid uncertain global macroeconomic conditions. RBI flagged upside risks from elevated global food prices, particularly of wheat, vegetable oils and feed costs. RBI Governor Shaktikanta Das said the transmission of high input costs to consumer prices has become “unprecedented ”, and “more potent than ever ”.  Economists and analysts expect RBI to further front load rate hikes in the upcoming meetings which according to some could take up interest rates to 5.15 per cent this year.

“Global commodity price dynamics are driving the path of food inflation in India, including prices of inflation sensitive items that are impacted by global shortages due to output losses and export restrictions by key producing countries,” the central bank said in a statement. RBI did not revise its inflation expectations for April, however analysts said that RBI action could have been prompted by latest inflation expectations. RBI has tools at its hand wherein it tracks high frequency economic indicators.

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