Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Tackling the inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Core inflation

Mains level : Paper 3- Inflation challenge

Context

Expectations that commodity and oil prices would cool down in 2022 as the pandemic ebbed were belied by the Russia-Ukraine conflict, which exacerbated existing pressures. Fresh lockdowns in China are also extending the pandemic-induced supply-chain bottlenecks.

Challenges for central banks

  • Systemically important central banks that viewed the consistent uptick in inflation as transitory — caused by post-pandemic supply shocks — are now finding it hard to bottle the genie.
  • Inflation in the time of weak growth: What central banks like even less is having to deal with rising inflation in times of weak growth.
  • Because the primary tool they have to fight it — the interest rate hikecan be recessionary.

Inflation in India

  • CPI inflation averaged 6.3 per cent in the January-March 2022, above the RBI’s target range of 2-6 per cent.
  • The RBI forecasts inflation for April-June at 6.3 per cent.
  • One more quarter over the 6 per cent mark, and the central bank would owe the government an explanation.
  • Factors driving inflation: Fiscal 2021-In fiscal 2021, inflationary pressures came largely from food and, to some extent, core which excludes fuel and food.
  • Fiscal 2022- In fiscal 2022, crude prices hardened to emerge as the new driver. Core inflation firmed up further.
  • But the drop in food inflation offset this, so overall inflation was lower at 5.5 per cent compared with 6.2 per cent the previous year.

Understanding inflation in fiscal 2023

  • What makes this fiscal worrying is, all three-fule, food and core are firmly pointing in the same direction — up.
  • Fuel inflation, in double digits for a year now, shows no signs of easing.
  • Energy prices have risen sharply across the board — from crude oil to coal and natural gas.
  • The cut in excise duties on petrol and diesel in November 2021 is insufficient to bring down fuel inflation, in the event crude prices stay above $90 per barrel this fiscal.
  • Food inflation: Food is the most volatile component and biggest mover of CPI inflation, given that it occupies 39 per cent weight in the average consumption basket.  
  • On the positive side, India looks set to enjoy a fourth successive year of normal monsoon and still has good buffer stocks of rice and wheat.
  • What is certain, though, is the rising cost of food production.
  • Prices of fertilisers, pesticides, diesel and animal feed are all surging.
  • Already pricey edible oils are set to get even costlier, with Indonesia’s recent ban on refined palm oil exports adding pressure.
  • No wonder then, food inflation is expected to rise.
  • Core inflation: Core inflation, a barometer of demand pressures, will continue to climb despite an environment of weak demand due to the persistence of supply shocks.
  • For producers, the bump-up in international prices across energy and metal commodities since the war has brought more pain.
  • But a weak and uneven demand recovery means producers had limited ability to pass on cost pressures to consumers.
  • Such pass-through has been partial, at best.
  • For most goods, CPI inflation has been much lower than the corresponding WPI last fiscal.
  • The pattern of recovery is also uneven across different segments, with contact-intensive services lagging formal manufacturing.
  • But contact-based services will catch up sooner or later, as restrictions become a thing of the past.
  • The last time we saw such broad-basing of inflationary pressures was after the Global Financial Crisis.
  • The difference this time around is consumer demand, which remains weak and will limit the extent of pass-through.

Conclusion

Forecasting inflation in such uncertain times is fraught with risk. The RBI has predicted ~5.7 per cent consumer inflation this fiscal, while professional forecasters see it at 5.6 per cent. The odds currently favour a higher inflation print, and a rate hike in June.

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