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Wednesday, August 10, 2022

Price to pay

Data suggests inflationary pressures are unlikely to moderate quickly. This may lead to MPC maintaining status quo

By: Editorial |
Updated: March 17, 2021 8:15:27 am
It would be easy to be cynical about Bajwa's outstretched hand, and with good reason.

Inflationary pressures in the Indian economy appear to be rising. Data on wholesale prices, released on Monday, and on retail prices, released last week, suggests that the increase in prices is not a one-off movement, but a more broad-based phenomenon. It is especially worrying that core inflation continues to remain elevated. Higher commodity prices, the normalisation of domestic demand, and an increase in the pricing power of producers, signal that these pressures are unlikely to moderate in the near term.

The data released by the government shows that the wholesale price index (WPI) rose to a 27 month high of 4.2 per cent in February, up from 2 per cent in January. Similarly, retail prices, as measured by the consumer price index (CPI), have risen to a three-month high of 5 per cent in February, up from 4.1 per cent in January. Part of the rise in inflation at both the wholesale and retail level is due to food prices. Food prices, at the wholesale level, rose to 3.3 per cent in February, after falling by 0.3 per cent in the previous month. At the retail level, the food price index rose to 3.87 per cent in February, up from 1.96 per cent in January. Core inflation, which strips away food and fuel, has hardened at both the retail and wholesale level, driven in part by rising global commodity prices, and an increase in pricing power on the back of strengthening of demand. Going forward, the hardening of crude oil prices is a matter of concern. According to data from the Petroleum Planning and Analysis Cell, the Indian crude oil price basket has risen from $54.79 per barrel in January to $61.22 in February, and is likely to rise further, as production cuts by oil producers have been extended, in the midst of a recovery in global demand.

As both global and domestic demand strengthens, a faster rollout of the vaccine programme will provide a fillip, core inflation is unlikely to moderate in the near term. And with governments unlikely to cut taxes on fuels, inflationary pressures are unlikely to abate. Elevated inflation, with upside risks, limits the policy choices before the monetary policy committee (MPC), which is slated to meet early next month. While economic activity has picked up, the recovery is not yet on a firm footing, suggesting that the MPC will continue to maintain the status quo.

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First published on: 17-03-2021 at 03:25:07 am
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