Number theory: Four charts that explain India’s inflation scenario



Retail inflation, as measured by the Consumer Price Index (CPI), grew at 7.79% in April , as per data released by the National Statistical Office (NSO) on May 12. This is the highest monthly inflation rate since the current government assumed office in May 2014. While the latest inflation number is still significantly lower than the all-time high of 11.51% in the month of November 2013 under the current series which starts from January 2012, it has triggered concerns about India’s economic prospects going forward. Here are four charts which present a detailed picture of what is going on .

Inflation has been gaining momentum at a sharp pace

What makes the latest inflation number a cause for concern is the fact that it only adds to fears that prices are growing at an accelerating pace in the Indian economy. April is the seventh consecutive month when the monthly inflation number has increased. While the headline CPI number crossed the 6% threshold of the upper limit of RBI’s tolerance band in January, the pace of increase in inflation has quickened significantly in the months of March and April, partly a reflection of the unfreeze in petrol-diesel prices which were locked during the assembly election cycle for five states. The latest inflation number also suggests that inflation for quarter ending June could end up being significantly higher than the 6.3% value that the Monetary Policy Committee (MPC) of RBI projected in its April meeting. While MPC did not make an alternative set of projections in its May 4 resolution, it did cite unanticipated upside risks to inflation.

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Fuel is not the only factor driving inflation at the moment

While inflation in the fuel and light category increased from 7.5% in March to 10.8% in April, fuel prices are not the only thing driving general price levels at the moment. Core inflation, which measures the non-food non-fuel part of the CPI basket and is expected to be more immune to seasonal fluctuations, grew at 6.98% in April , the highest since June 2014, which suggests that price pressures have become broad based in the economy. The fact that non-core inflation is even higher — it grew at 8.7% in April — will only feed into core inflation via what are called cascading effects.

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The food inflation fire has spread to cereals as well

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The food component of the CPI basket has seen an annual growth of 8.4% in the month of April . While the overall food inflation levels are hardly unprecedented – it was continuously above this value between November 2019 and November 2020 – what is cause for concern is the rapid surge in prices in the cereal category, especially that of wheat.

Monthly inflation for the cereals and products sub-category has increased every month since September 2021 when it was -0.6%, to reach 6% in April 2022. Once again, while cereal inflation has also been higher in the past, reports of India’s wheat production being lower than expected this year, a surge in international prices leading to a jump in exports, and farmers deciding to sell to private traders instead of bringing their crop for government procurement have raised concerns about a depletion in government stocks leading to further pressure on cereal prices. To be sure, cereals are not the only food item which are showing high inflation. The sub-category of vegetables and edible oil saw an inflation of 15.4% and 17.3% in the month of April.

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Policy makers will need to guard against “nominal illusion” hiding stagflation risks

The latest inflation numbers, when read with the tepid 1.9% growth in the Index of Industrial Production (IIP) for the month of March, do not bode well for the state of the economy, which seems to be caught in a low-growth high-inflation or stagflation like situation.

Given the fact that monetary policy will increasingly turn hawkish going forward, this calls for a more proactive fiscal policy approach to protect, even promote demand. Whether fiscal policy takes up this challenge or not will also depend on its ability to stay clear of what economists call a “nominal illusion” which has given an artificial boost to some high frequency economic indicators such as tax collections or export earnings. Sajjid Chinoy, the chief India economist of JP Morgan had warned against this in an article for BQ Prime.

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In fact, the latest IIP numbers underline the precarity of consumer demand in the Indian economy. The consumer goods sub-category of the IIP in March was actually lower than its March 2021 value, which was primarily a result of a contraction in the consumer durable category. With inflation expected to put a squeeze on purchasing power and additional headwinds from an increase in debt servicing costs due to rising interest rates, aggregate demand will only face a big challenge going forward. When RBI releases its forward looking surveys in the first week of June, we will have greater clarity on the damage inflation has done to consumer sentiment and the extent of hardening of inflation expectations.

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