Ad-H Ad-H

Falling commodity prices may soften inflation, but it may remain elevated

Ad P

Across the world, countries are fighting to contain inflation, even if this means some compression in demand and slowdown in economic growth. This was quite evident when the US Federal Reserve raised its benchmark interest rate by 75 basis points (bps) last week to contain a four-decade-high inflation rate. India is no exception.

In India, the consumer price index (CPI)-based inflation rate was over six per cent, beyond the upper tolerance limit of the monetary policy committee (MPC), for the six month in a row in June. And Parliament is likely to take up the issue on Monday. The MPC too will deliberate on this at its three-day meeting from Wednesday.

If it remains above six per cent for the next three months on average, the Reserve Bank of India (RBI) will have to explain to the government in writing the reasons behind its failure to contain the rate of price rise below six per cent, suggest remedial measures, and provide a time-frame by when the rate will fall below six per cent.

In fact, over the last three months inflation has remained above seven per cent, though it declined from 7.79 per cent in April to 7.04 per cent in May and 7.01 per cent in June.

Within overall CPI inflation, the rate of price rise in food items has remained above seven per cent since March. It peaked at 8.31 per cent in April and then eased in the next two months. The precise impact of the imposition of the goods and services tax (GST) on pre-packaged food items, even if they are unbranded or of local brands, would be known partially in July and fully in August data which comes with a one month lag.

Global commodity prices

The global commodity prices are falling on fears of a recession in the advanced world even as the Russia-Ukraine war lingers on. This may dampen the retail price inflation rate in India, too. However, part of this is likely to be negated by the impact of a depreciating rupee against the dollar. As such, the inflation rate may remain elevated for some more months.

Brent crude futures were down $1.19, or 1.1 per cent, at $102.78 a barrel at 7.42 am (IST), while West Texas Intermediate crude was trading at $97.19 a barrel, down $1.43, or 1.5 per cent, on weak manufacturing data in China and Japan for July. Also, investors are looking out for this week’s meeting of officials of the OPEC (Organization of the Petroleum Exporting Countries) bloc and other top producers on supply adjustments.

Back home, the Indian basket of crude is more relevant. Its prices stood at $108.92 a barrel as on July 29. The average price in the month of July stood at $105.49 a barrel, down from $116.01 the previous month.

On the other hand, growth impulses on at least the industrial production front are still fragile.

Meanwhile, the rupee depreciated further from 78.01 against the dollar on average in June to 79.21 on average in July.

However, fuel and light inflation was quite high at 10.39 per cent in June, up from 9.54 per cent in the previous month. But, the break-up of this inflation rate shows that the inflation rate for petrol fell to 5.37 per cent in June from 16.83 per cent in May, and that of diesel to just 0.68 per cent from 11.52 per cent. This happened as the government and states cut taxes on these two fuels.

However, fuel and light inflation still showed a higher rate since some other items, like liquefied petroleum gas (LPG) saw 21.17 per cent rate in June, up from 19.35 per cent in May.

The net result may still lead to some easing of the inflation rate. However, it should be noted that the effect of falling global commodity prices, barring fuels, is felt more in immediate terms on the wholesale price index (WPI)-based inflation rate than its CPI counterparts. Its impact on CPI inflation rate comes with a lag.

The WPI inflation rate remained elevated in June, though it moderated to 15.18 per cent from 15.88 per cent the previous month. WPI inflation rate has remained in double digits since May 2021. This means that even the high base effect for the first three months of the current financial year could not bring it down.

Though the MPC has focused on food and fuel inflation rates recently due to elevated inflation, these rates are often considered volatile. That is why the MPC generally looks at core inflation, which excludes food and fuel items.

Core CPI inflation rate has remained at 5-6 per cent since at least March 2021.

Source link

Leave a Comment