In India, inflation rate as measured by the consumer price index (CPI) reached 6.30 per cent in May 2021, breaching the upper band of 6 per cent under the inflation targeting framework. The supply side disruption caused by lockdowns and other restrictions could be cited as a major factor in pushing the inflation rate to an uncomfortable range.
Last year, when the country was in a complete lockdown, inflation rate reached 7.22 per cent (in April’20). Yet, the wholesale price index (WPI) that tracks changes in prices at the wholesale level registered 1.57 per cent negative growth in April 2020. Currently, one could witness price pressure at the wholesale level too.
For instance, WPI registered 13 per cent growth in May 2021. The low base effect is a major factor that has pushed the WPI to double digits as inflation rate (WPI) was at (-)3.37 per cent in May 2020.
Nevertheless, rising fuel prices have also contributed to the elevated price levels, as evident from the growth rate of various components in WPI. For instance, crude petroleum and natural gas registered a growth of 56.06 per cent. Similarly, mineral oils registered a growth of 81.16 per cent YoY in May 2021. In this backdrop, one needs to be extra-cautious as rising fuel prices can heat up the economy as a whole. Fuel prices have a trickle-down effect, as its impact can be seen across sectors, pushing up the cost of transportation, raw materials and food prices. Rising fuel prices could lead to higher retail inflation i.e. one needs to spend more money on commodities and services.
RBI would be in a dilemma, as it follows an inflation-targeting framework, with the inflation goal at 4 per cent, +/- 2 per cent. Whole on the one hand, the central bank has to devise measures to support growth, and on the other hand it needs to control inflation rate. Rising inflation rate has also sparked a debate on whether the Indian economy is experiencing stagflation.
A rate hike at this juncture can prove costly as the domestic economy is still on the recovery path. Yet, if the inflation rate remains at elevated levels, the economy will be experiencing negative real interest rate. Thus, there should be concerted efforts from both the central and state governments to control fuel prices as its negative impact can be much larger for an economy on the recovery path.
Business News Governmental News Finance News
Need Your Help Today. Your $1 can change life.