The supply constraints driven by labour shortage rather than a high fiscal deficit or other external factors may keep the CPI inflation at elevated levels.
Prices of household items in India are likely to remain high in the coming months as well. The supply constraints driven by labour shortage rather than a high fiscal deficit or other external factors may keep the CPI inflation at elevated levels, according to the SBI Ecowrap report. The report also suggested the government should take into account the online prices of products while computing retail inflation as there is a rising number of people relying on online stores for their needs, especially after the outbreak of the coronavirus pandemic.
By including irrelevant items including services, and others whose consumption fell drastically after the coronavirus kicked-in, it has been underlined that the Ministry of Statistics and Programme Implementation (MOSPI) has understated the retail inflation. The report showed that the actual headline inflation is much above the estimates of the National Statistics Office (NSO). According to the SBI research, the headline retail inflation for June 2020 was 6.98 per cent, which is 90 basis points higher than the NSO estimates of 6.09 per cent.
With the pandemic showing its effects on the economy, many middle and low-income countries are facing a similar challenge of high retail prices. The SBI report added that it will be a tough call for the RBI in the coming MPC meet, scheduled between 4-6 August.
Meanwhile, as SBI report attributes the impact of adverse supply-shock on the high retail prices, Sreejith Balasubramanian, Economist – Fund Management, IDFC AMC, said that it is almost entirely driven by rural India. A higher rural demand, likely driven by good seasonal agricultural activity, government spending, and MNREGA support must have kept the prices at elevated levels, he further said. However, the sustenance of rural demand could be challenged due to labour dynamics as the crop season ends and the real hit on demand, from Covid-19, would become more visible, he added.