The Price Pinch
Present circumstances:
- The ability to control inflation within the acceptable range will be crucial for India’s economy to recover from the epidemic and accompanying global disruptions.
- Prior to reaching its subsequent top in January, it softened for three straight months. The RBI has been acting as an inflation-targeting central bank in recent months by raising interest rates in an effort to keep inflation under control. But the fight to lower inflation is undoubtedly not over.
- The most recent inflation statistics also raise concerns about the RBI’s level of effort.
Targeted inflation’s bandwidth and location:
- The inflation targeting framework requires the RBI to attain a 4% CPI (consumer price index) inflation objective.
- From March 2020 to September 2021, the pandemic period, CPI inflation was 5.9% on average.
- This exceeded the 4% point objective, but it was still within the 2-6% range for inflation that was desired. Yet, the inflation outlook has been worse since then.
- The RBI’s targeted range was surpassed by the CPI inflation rate for 10 consecutive months in 2022, which meant that the goal was missed for three consecutive quarters.
- The end of the year saw a beginning of the inflation slowing. In December 2022, the CPI inflation rate dropped to 5.7%.
- Many were led to think that the inflation peak had passed and that inflation was now heading in the direction of the predetermined aim.
- The price of vegetables fell dramatically in November and December 2022, which contributed significantly to the reduction of inflation.
- When vegetables were removed, the CPI’s inflation rate was really higher than 7%.
- It is now obvious that the optimism was misplaced. The CPI inflation rate for January 2023 was 6.5%, which is once again higher above the RBI’s planned inflation range.
The following are the main reasons why inflation has risen over target levels:
- Firstly, as food accounts for 46% of the CPI basket as a whole, an increase in food inflation from almost 4% in December 2022 to almost 6% in January 2023 has had a major influence on total inflation.
- One meal that has shown to be extremely resilient is cereal inflation. From May through December 2022, the price of cereal increased by 14% every year instead of the previous 5%.
- In January 2023, this increased to 16%. Within the cereal group, wheat inflation has been gradually increasing. Between May and December of 2022, the price of wheat increased from 9% to 22%. By January 2023 rolled around, it had increased to 25%.
- Due to shortages, the price of wheat has increased significantly. According to data from the Food Corporation of India, stocks in government warehouses declined from 33 million tonnes in January 2022 to 17 million tonnes in January 2023. The government just approved the release of three million tonnes onto the open market.
- The second factor is an increase in core (non-food, non-fuel) inflation, which reached 6.2 percent in January.
- The core inflation rate, which has been at 6% for almost three years, is consistent with this. A persistently high core inflation indicates that pricing pressures have entangled the system.
- The ongoing conversion of high input costs into final product prices helps to explain some of this.
- The fact that this is happening despite WPI inflation, which gauges input costs, declining from a peak of 16% in May 2022 to less than 5% in January 2023, is interesting.
- This shows that because margins are being squeezed and profitability is declining, businesses are spreading out the pass-through over a longer time period. As a result, the course of core inflation is unpredictable.
- Outside factors are also significant, to sum up. In prosperous countries, the inflation rate is still high (6.4 per cent in the US; 8.5 per cent in the EU; 10.5 per cent in the UK).
- A portion of India’s high inflation is brought in through commerce in goods and services.
- Furthermore, higher commodity prices could add new pressure to India’s inflation as China liberalises its economy more after nearly three years of zero-Covid restrictions.
What actions have policymakers made to address inflationary concerns? (Fiscal and monetary policy):
- The government has helped by announcing a cautious Union budget for 2023–2024.
- It has prioritised the very important task of budgetary consolidation and postponed implementing populist measures that may have boosted demand and, as a result, inflation.
- The RBI has been carrying out its obligations. It increased the policy repo rate from a pandemic low of 4% to 6.5% in just 10 months.
- It has also adopted a more hawkish attitude, as seen by its most recent monetary policy statement. In contrast to last year, when, despite rising inflation, the monetary policy statements lacked any sense of the future, the RBI emphasised the need to “stay attentive on inflation” in its February 2023 statement, suggesting that the cycle of monetary tightening is sustained in order to control inflation.
Moving ahead:
- After failing to meet the inflation target for three consecutive quarters, the RBI was obligated to provide the government with a report outlining a strategy for lowering inflation in 2022.
- Law does not force the government or the RBI to make the contents of this report public. The report’s publication, which focuses primarily on the corrective actions the RBI intends to take, may help to stabilise inflation expectations and facilitate the central bank’s own efforts to fight inflation. This is due to the fact that it is difficult to manage inflation and that it is unlikely that the 4% objective will be attained next year either.
- Since inflation disproportionately impacts the poor by lowering their purchasing power, it is essential to create a trustworthy glide path to drop inflation to the desired level.
