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On retail inflation - February 2021

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February 19, 2021

What is the issue?

  • India’s retail inflation - Consumer Price Index (CPI) - slowed to a 16-month low of 4.06% in January 2021.
  • However, various factors make the inflation outlook for the coming months less encouraging, calling for a cautious approach.

What is the inflation scenario?

  • Inflation appears to have cooled after having stayed stubbornly stuck above the RBI’s upper tolerance threshold of 6% for six months through November 2020.
  • The latest retail inflation readings offer monetary authorities a fair amount of comfort.

What was the driving factor?

  • The deceleration was helped by an appreciable softening in food prices.
  • Specifically, the Consumer Food Price Index reflected a gain of a mere 1.89% in January 2021.
    • vegetable prices saw a disinflation of 15.8%
    • cereal prices eased considerably for a second month in the wake of kharif crop arrivals
  • The RBI in its recent monetary policy statement, cited the below as factors that augured well for the months ahead-
    1. the bumper kharif crop
    2. rising prospects of a good rabi harvest
    3. larger winter arrivals of key vegetables
    4. softer egg and poultry demand on avian flu fears

What is the need for caution though?

  • Food costs - The central bank was mindful of the risks too. This is especially with regard to food costs.
  • The latest data on this had brought to the fore concerns over the prices of pulses and edible oils.
    • While inflation in pulses and products was at 13.4%, that for oils and fats stood at 19.7%.
    • Eggs, and meat and fish, both posted double-digit rates of 12.9% and 12.5%, respectively.
  • Base effect - Inflation moderated by more than 100 basis points in February 2020 to 6.58% before slowing to 5.84% in March 2020.
  • This favourable base effect is also beginning to wane.
  • So, the outlook for the coming months is far from reassuring.
  • Input cost - Of particular worry is the trend in input costs for multiple sectors in the real economy, including manufacturing.
  • From automobile manufacturers to builders, rising raw material costs are beginning to force them to pass on the impact to the end consumers.
  • And this is going on when demand is yet to pick speed.
  • The latest Purchasing Managers’ Index (PMI) points to the sharpest increase in purchasing costs for more than 2 years.
    • This is because of the continuing supply-side squeeze.
    • The resulting inflationary pressures made manufacturers to raise their product prices at the fastest pace in over a year.
  • Fuel price – Adding to the above concerns is the rising transportation fuel prices to newer and newer record highs in recent days.
  • Diesel, the main fuel for freight carriage, has now exceeded Rs.80 per litre.
  • This is bound to feed into prices of almost everything being transported across distances.
  • With this, the outlook for inflation becomes distinctly darker.
  • Policymakers need to maintain a strict vigil to keep inflation from resurging and posing a threat to macro-economic stability.

 

Source: The Hindu

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