Retail inflation galloped to an eight-year high of 7.8% in April, much higher than the Reserve Bank of India’s outer target of 6%, driven by a spike in food prices which have nearly 46% weight in the consumer price index. Among food items, prices of vegetables and edible oils rose the fastest. Food inflation is mainly driven by rising costs of production, surging international crop prices and extreme weather-related disruptions. While vegetable prices fluctuate seasonally, the edible oil prices are likely to face inflationary pressure till domestic production rises.
Even globally, prices of edible oils have risen sharply because of the ongoing Russia-Ukraine war and the pandemic-induced supply-side disruptions. In the US, retail inflation rose to 8.5% in March, the highest since December 1981.
Fuel and transport, which account for 15.4% of the index, saw inflation close to 11% as oil marketing companies increased prices of petrol, diesel and cooking gas. Brent crude prices have remained above the $100 per barrel-mark since March this year. In fact, between FY12 and FY14 when crude prices were around $100 a barrel, the consumer price index rose to 9.2%. Rising transportation costs are pushing up the wholesale price index and the gap between the retail and the wholesale price index is widening.
The spike in inflation strengthens expectations that the Reserve Bank of India may raise the repo rate once again in its policy review early next month after the surprise hike of 40 basis points on May 4, the first increase since 2018 and the sharpest in 11 years. Banks have raised their lending rates and borrowers are feeling the pinch.
Up, Up and Away…
Inflation spirals because of higher global commodity prices, supply-chain disruptions and demand-side pressure, especially in certain contract-intensive sectors.
… Much Before The Russia-Ukraine War
Even prior to the Russia-Ukraine war, inflation had surged in many economies because of soaring commodity prices and pandemic-induced supply-demand imbalances.
Global food prices spike
World food commodity prices reached their highest levels ever in March as war in the Black Sea region spread shocks through markets for staple grains and vegetable oils
Pain of the consumer
In India, rising consumer food inflation is putting additional pressure on households hit by Covid pandemic and subsequent job losses
Eating into discretionary spending
An analysis by Sakshi Gupta, principal economist of HDFC Bank in a news publication shows that a 5% increase in spending on fuel and transport could reduce overall households’ consumption levels in the economy (in nominal terms) by
RBI hikes policy rate
In order to rein in the runaway inflation, the Reserve Bank of India increased the repo rate by 40 basis points to 4.4% on May 4 and more hikes are expected in the current financial year which will increase the interest burden of borrowers
However, savers will gain as banks are increasing the deposit rates
The increased rates would not apply to existing fixed deposit accounts as they come with a pre-fixed rate. However, it may be a good time for customers looking to open new FD accounts to earn higher returns
(Graphics by V Venkatesulu)