Though benign food inflation kept January CPI inflation in check; rising fuel prices could spoil the party

Food Inflation and industry crisis due to fuel price rise

It has been indicated by the RBI that the food inflation trajectory will shape the near-term outlook of the inflation; the rise in crude oil prices may create inflationary pressure, going forward.

The prices of diesel and petrol increased for the 12-straight day when this piece was being written. Thanks to the crude oil prices which have been on the rise since seeing a debacle in March 2020. The US WTI crude prices came crashing down below USD (-) 37. As the economies are opening up and lives getting back to normalcy from the onslaught of coronavirus pandemic, the consumption of fuel will likely go up in the days to come.

While the common man is getting hit with rising fuel prices that also includes hikes in LPG prices, moderation in food inflation has provided some much needed relief. The Consumer Price Index (CPI) or retail inflation in India stood at 4.06 per cent in January 2021 compared with 4.59 per cent in December 2020, touching a 16-month low.

Retail inflation in urban and rural India stood at 5.06 per cent and 3.23 per cent respectively.

The CPI is a barometer that examines consumer spending on a basket of goods and services. It includes food and beverages, fuel and light, housing, clothing and bedding and footwear.

Benign Food Inflation

Data released by the Ministry of Statistics and Programme Implementation (MoSPI) showed that food inflation fell to a 20-month low of 1.89 per cent. Inflation in food and beverages eased to 2.67 per cent in January as against 3.87 per cent in the preceding month. There has also been a significant fall in the prices of eggs, meat and fish.

But the real impact has been from the vegetable basket. In January 2021, the drop in the prices of vegetables have been at 15.84 per cent which was much better than the 10.41 decline in December. Vegetable prices coming down has been a welcome relief for the common man. The prices of food prices have come down on the back of improving supply side constraints.

Why this is an important number

From the standpoint of common man a lower retail inflation would ensure a higher consumption. The headline numbers also hold importance from the viewpoint of the RBI whose primary job is to target inflation. At this level, the CPI inflation has stayed within the comfortable range of 4 per cent (+/-2 per cent) for the banking regulator. This will ensure that the RBI is not forced to increase interest rates to control inflation. A lower interest rates augurs well for the economy as this would drive consumption.

Inflation in food and beverages eased to 2. Though core inflation was unchanged at close to 5.33 per cent in January.

Low interest rates are vital as they enable spending trends in things which man not appear as the most important need. One such scenario is the sales of automobiles and residential properties. While the pandemic has created new normal by ensuring social distancing measures become a way of life, it has also forced people to think in terms of owning a house or a vehicle. This has created a demand in both these sectors and lower interest rates have helped.

Other constituents of CPI inflation

Among other constituents, clothing and footwear inflation increased to 3.82 per cent in January from 3.49 per cent in December. Meanwhile, housing inflation was marginally up from 3.21 per cent in December to 3.25 per cent in January.

Inflation for household goods and services was also down to 2.80 per cent compared with an increase of 2.95 per cent in December.

Health inflation increase was flat standing at 6.02 per cent as against 5.98 in the month ago period.

As for inflation in transport and communication heads, the inflation stood at 9.32 per cent in January and December months.

Caveats

While the CPI numbers look optimistic, a media report suggested that the headline numbers did not capture the rise in cereal prices seen in January.

Moreover, it has also been indicated by the RBI in its latest monetary policy statement that larger-than-anticipated deflation in vegetable prices in December has brought down the headline inflation closer to 4 per cent – the target level set by the Central Bank. However, the food inflation trajectory will shape the near-term outlook of the inflation, it had further said.

Fuel and light inflation was up at 3.87 per cent in January from 2.99 per cent in December. If the fuel prices continue to grow as they are, it is quite likely that the advantages would potentially neutralise any benefit caused due to the deflation in the prices of food items. A low base effect in vegetable prices over the last two months may cease. A low base effect can soften the food inflation numbers, going forward as the fuel cost would eventually start reflecting in the edible items.

Also, a further uptick in LPG prices may further put a dent in household expenses. Fuel price also account in the overall CPI numbers. One must not ignore it if the targeted inflation is to be achieved. The governments can cut taxes at the state and central level to give some relief on this count to the common man.

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