Transient easing: On inflation

Synopsis: Cutting fuel taxes is a sure-shot way to address a major component of price pressures.

Introduction

The latest retail inflation data suggest, that price pressures have begun to moderate in the economy, with CPI showing inflation having slowed for a second month to 5.3%, after July’s 5.59%.

However, price trends among the constituents of the Consumer Price Index and the Wholesale Price Index-based inflation, show that it would be premature to drop the guard on price gains.

Why it is necessary to control price gains?

Contradictory inference of softening inflation: the year-earlier inflation reading was elevated which passed a favourable base effect. However, the CPI nudged up 0.25% from July, contradict the inference of softening inflation.

Price gains of essential food items: In at least three essential food components price speeded up from the preceding month, with meat and fish, dairy and oils and fats posting significant rise.

Same scenario is with edible oils and an earlier round of cuts in import duties have had little impact in cooling their prices.

Inflation in vital protein sources: price rise of eggs and pulses also continued to remain a cause for concern. However, a wider deflation in vegetable prices was the main positive contributor to the easing in overall food and beverages inflation last month.

Higher transportation costs: The pace of inflation in fuel and light, clothing and footwear, health as well as household goods and services all saw a contraction last month.

Transport and communication, which includes pump prices of the main automotive fuels of petrol and diesel, stayed stuck in double digits at 10.2%.

The WPI data show higher transportation costs combined with input price pressures ignite faster inflation in manufactured products as well.

PMI survey: the outlook for inflation is far from positive for services, as the input costs rose in August at the fastest rate in four months. Also, as per a recent CII poll of CEOs, a majority 67% expect average retail inflation this year to exceed the RBI’s mandated monetary policy upper threshold of 6%.

What is the way forward?

First, policymakers need to be well aware that inflation is not just about a point reading, but about consumers’ and businesses’ expectations of the trend in prices. Fears of future high inflation dampen sentiment and thus retard economic activity.

Second, government need to consider cutting fuel taxes to address a major component of price pressures.

Source: This post is based on the article “Transient easing” published in the Hindu on 16th September 2021.