Covid-19 disruptions may push up retail inflation

When okra costs ₹80 a kg in Noida and the price of a tender coconut rises from ₹35-40 to over ₹100 in New Delhi, or petrol prices in Mumbai come within striking distance of the ₹100 a litre-mark, family budgets go awry.

On May 14, petrol price in Mumbai moved up to ₹98.65 a litre and diesel, ₹90.11, according to a notification from oil marketing companies. Petrol prices in several places in Maharashtra, Madhya Pradesh, and Rajasthan have already breached the ₹100 per litre-mark.

Two days ago, the Ministry of Statistics and Programme Implementation (MoSPI) announced that India’s retail inflation, based on the consumer price index (CPI), had eased to 4.3% in April, down from 5.5% in March. But analysts and policy experts said it’s likely to inch up, going forward.

Amid the state-wide lockdowns imposed to tackle the surge in Covid-19 infections, and the concomitant supply-chain disruptions, concerns of a rising inflation are far from over. As the drop in retail inflation was driven by a fall in prices in the food basket, it is unlikely that the CPI would remain at the April levels. According to the ministry’s data, food inflation had dipped 250 basis points to 2.7% in April over the previous month.

CARE Ratings said that inflation in April had come down due to a sharp fall in vegetable prices. “If this segment is excluded, headline inflation would be 5.6%,” the rating agency said, adding that the underlying price pressures are expected to prevail.

“The spread of the pandemic and fresh curbs across the country has once again led to supply chain disruptions, impacting prices across segments. Seasonal factors will push up prices of vegetables and lead to higher inflation. Also, global commodity prices have been firming, feeding into input costs. In addition to this, transportation and logistics costs would be sustained at elevated levels,” said CARE Ratings, in a report.

Analysts predict that these upside side risks to inflation will restrain the Reserve Bank of India (RBI) from lowering interest rates anytime in the near future.

Inflation in food and beverages had fallen to a 22-month low of 2.7% in April, down from 10.5% in April 2020. But supply constraints, higher demand, and increasing transportation costs have put an upward pressure on food prices.

A cursory look at the numbers reveals that the decline in the overall food inflation is driven by vegetables. Prices have been high in the case of meat, fish, eggs, fruits, edible oils, and pulses. CARE Ratings said the prices of vegetables were eased with the seasonal arrival of produce and the high base effect. Vegetable prices witnessed a year-on-year contraction of 14% last month vis-à-vis a 24% growth in April 2020. Increased domestic demand and higher cost of imports have pushed up edible oil inflation by a record 26% from a year ago (11% in April 2020). The price rise in pulses by 8% (over 23% growth in April 2020) is driven by supply shortages in the producing regions within the country as well as the overseas markets due to adverse weather conditions, said the rating agency.

Interestingly, the increase in price levels has been sharper in the urban areas than in rural areas.

“Within food, increases in fruit, cooking oil, meat, and pulses prices sequentially were partly offset by declines in prices of vegetables and cereals. Core inflation (excluding food, fuel and intoxicants) eased 50 basis points to 5.2% but rose sequentially across most sub-categories,” said Emkay Global.

According to a report by Edelweiss, the dip in food inflation (down 250 basis points to 2.7%) and core CPI (down nearly 40 basis points to 5.4%) predominantly reflects the base effect. “Within food, while cereals, vegetables, and sugar are deflating; edible oils, eggs, meat, and fish remain elevated,” the report said.

Within core CPI (still elevated despite easing), while energy-related categories eased a bit from the high levels, goods are facing cost-push pressures, said Edelweiss in the report.

Vivek Rathi, director-research at Knight Frank India, said the expectation of a normal monsoon and the accommodative RBI stance provides comfort at this juncture as the country battles the second wave and attempts to overcome it with minimal damage to lives and livelihood.

The central bank believes that a normal monsoon predicted by the India Meteorological Department (IMD) is expected to sustain rural demand and overall output in 2021-22, while also having a soothing impact on inflation pressures.

“Going forward, a normal south-west monsoon, as forecast by the IMD, should help to contain food price pressures, especially in cereals and pulses. The build-up in input price pressures across sectors, driven in part by elevated global commodity prices, remains a concern. The inflation trajectory over the rest of the year will be shaped by the Covid-19 infections and the impact of localised containment measures on supply chains and logistics,” the RBI had said earlier this month.

Most analysts and economic policy experts believe that retail inflation will move up above 5%.

“Going ahead, we envisage CPI to revert to 5% plus as base effect reverses. Upside risks arise from sustained rise in global agri prices, which could spill over into domestic prices with a lag,” said Edelweiss.

CARE Ratings expects CPI inflation to rule above 5% for the next two-three months. “We believe CPI could average 5.5% in 2021-22, 50 basis points higher than the RBI’s projection. We expect the central bank to look through these upside risks as the second wave and lockdowns could keep demand pressures muted and output gap negative for longer,” it said.

Emkay Global said upcoming inflation prints may shoot up to above 5.2% led by higher fuel cost and select perishable and non-perishable food inflation and sticky core inflation.

With the second wave of the pandemic showing no signs of abating and the prospect of a third wave looming large, concerns of rising inflation are likely to stay here for a long time.