ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Spiralling Prices

It is a clear case of the government doing too little too late.

After stalling for months together the government has suddenly gone into a firefighting mode in a desperate bid to arrest the surging prices. As part of such efforts, the Reserve Bank of India suddenly called an off-cycle policy meeting and increased the cash reserve ratio by 50 basis points to 4.5% and the repo rate by 40 basis points to 4.4%, the first rate hike after August 2018. The government followed it up with a ban on wheat exports, resulting in vocal protests from across the globe. Later, it announced an excise duty cut on diesel and petrol and a `200 subsidy on cooking gas cylinders for 12 months to stop fuel prices from scorching consumers. The government also allowed duty-free imports of edible oils and restrained sugar exports to reduce the pressure on food prices. This sudden flurry of measures was in response to the continued increase in consumer price inflation. Consumer prices, which have steadily picked up in the last six months, suddenly surged to 7.8% in April 2022, the highest in eight years (after May 2014). This sharp surge, far beyond the mandated 2% to 6% range, has badly eroded the credibility of the inflationary targeting framework instituted to maintain price stability. The important reason for the price surge was the sharp rise in fuel and light prices, which was strategically suppressed for a few months before the assembly elections. They have now suddenly bounced back to double digits following the hike in international oil prices after the war in Europe.

However, the main driver of the surge in the consumer price index (CPI) was the increase in food prices, which rose from 0.7% in September 2021 to 8.4% in April 2022. Among food products, the highest increase was in edible oil and fats (17.3%) in April 2022. This was mainly fuelled by the rise in international edible oil prices after the disruption of trade following the war and the ban on oil exports by Indonesia.

And the medium-term trends in food prices are more worrying. This is because the prices of other items of mass consumption have also soared. Despite huge buffer stocks, the prices of cereals have gone up from negative to 6% in the last seven months. Similarly, while the increase in the prices of spices has gone up to double digits, that of fruits and vegetables have doubled in recent months. Moreover, the prices of other items of daily use like clothing and footwear have shot up steadily for the last 13 months to close to double digits. This rampant surge in the prices of basic daily items will badly singe the poor.

To make matters worse, the prices of services continue to accelerate even after the containment of the pandemic. For instance, the prices of goods and services consumed by households have shot up from 1.9% in April 2021 to 8% now. And the price increases of recreation and health services have moved up above 7%, while that of personal care is above 8%, and that of transport and communication above 10%. All these belie the claim of supply-side bottlenecks being the main reason for the rising prices.

Consequently, core consumer prices, which means the prices of goods and services, excluding that of volatile products like food and energy, have shot up to 6.9% in April 2022—the highest in the last six years. This is much larger than the 2%–3% core price inflation in the countries of the far east and even higher than in the United States and the United Kingdom where the expansionary fiscal policies have caused core prices to move up slightly above 6%. Clearly, the current bout of inflation here seems far more entrenched than in most other economies.

Similarly, the sharp spread of spiralling prices across states also points to a further entrenchment in the domestic inflation trends. In the seven months between September 2021 and April 2022, the number of states where the CPI has remained below 6% fell from nineteen to two, while the states with the CPI surging above 6% increased from two to twenty. In April 2022, the lowest consumer inflation was in Kerala at 5.1% and the highest in West Bengal at 9.1%.

And the spiralling prices in the rural sector have added to the misery. Though rural consumer prices had shot up faster than the urban consumer prices in the early months of the pandemic, it has been relatively more subdued throughout 2021. But in 2022, even after the peaking of the third wave of the pandemic, rural consumer prices have steadily surged up over the urban consumer prices and lowered real incomes much faster in the countryside.

The worst part is that the current surge in consumer price inflation is unlikely to recede quickly. This is because the wholesale price index has been steadily rising in double digits in the last 13 months and touched 15.1% in April 2022, the highest in three decades. And with wholesale prices of food, fuel, and manufactured goods prices showing no signs of deceleration, these escalating trends are sure to be transmitted to the CPI in the coming months and will further add to the inflationary spiral.

Rising inflation would also negatively impact exports and also the rupee exchange rate and further add to the pressure on prices. Given this scenario, the central bank has no option but to continue to shift to a hard monetary policy stance with its negative implications on growth. So, tackling the current inflationary spiral will now require more substantial interventions. Clearly, a case of the government doing too little too late.


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Updated On : 4th Jun, 2022
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