Pricey haircuts seen messing up India’s retail inflation outlook

By Anirban Nag

Rising costs of services, from hair stylists to security guards, are a new challenge for India’s monetary policymakers, who stand ready to resume interest-rate cuts as soon as the food-price driven spike in inflation wears off.

Services inflation surged to 4.8% in September from a year ago, compared with 4.4% in February before the coronavirus outbreak, according to estimates by Citigroup Inc. The pickup reflects cost-push factors associated with the pandemic, such as social distancing and screening of customers, as well as fewer workers in urban centres after migrating back home during the nationwide lockdown.

“While the increase is not much, directional movement is rather counter-intuitive since services inflation is mostly synchronous to the demand cycle,” Samiran Chakraborty, chief India economist at Citi, wrote in a report last week.

Also read — Retail inflation eases marginally for farm, rural workers in September

That complicates the central bank’s inflation outlook, which forecasts overall consumer-price growth to slow to 5.4% in the three months to December from about 7% last quarter. While the estimate relies largely on food prices coming off the boil and supply chains being restored, latest trends show vegetable prices remained stubbornly high and supply lines are yet to be mended.

India's rising food prices underpin headline inflation

A spike in inflation was the main reason for the central bank to halt its policy easing after delivering 115 basis points of rate cuts this year. The Monetary Policy Committee, however, decided to look through the current inflation hump as transient and retained an accommodative stance this month to support an economy headed for its worst annual contraction.

“Unprecedented inflation fee” is how Sanjiv Mehta, the chairman and managing director of the local unit of Unilever Plc, described the commodities cost for the personal-care products and processed-food maker. “We believe the inflation in select categories is likely to continue in the near-term,” he said Tuesday.

Also read — Retail inflation expected to stay close to targeted level by last quarter of FY21, says RBI Governor Das

Clues for whether sticky-price pressures could keep policymakers on pause for longer will be available when the minutes of the MPC’s latest meeting are published Friday. Three of the six-member rate panel were appointed this month and are seen by many economists as more dovish than the previous members.

“The current growth-inflation assessment seems to suggest that the MPC would like to stay on a long pause,” Citi’s Chakraborty wrote. “Sluggish growth momentum would force the MPC to keep rates low while fear of inflation might not let them cut any further.”