Rising inflation is cause for worry

There are worrying indications on the inflation front, with retail inflation rising by 6.1% in June when the economy started reopening after more than two months of lockdown. The rate has risen above the Reserve Bank of India’s toleration level, after keeping a subdued but rising trend in the previous months. The disaggregated data is more worrying, because food inflation rose by 7.3 %, prices of pulses by 16.7% and fish and meat prices by 16.2%. Milk prices were up by 8.4%, though farmers had to sell them at reduced prices due to lack of demand. Transport and communication costs also increased because of the hike in petrol and diesel prices. Only the prices of fruits and vegetables did not record any major increase because being perishables, a good part of them was lost. Such a fast-rising trend has not been seen in the past many months.

The items whose prices have tended to rise are the most essential items. This will have a major impact on family budgets, especially because incomes have shrunk across all sections of people. It is likely that the prices continued to rise after June because transportation costs have increased with the continuous increase in the price of diesel. Steel and cement companies have announced an increase in prices, and the higher import duties on Chinese goods can spur some price increases in the domestic market. If banks are unable to lower interest rates, working capital costs will remain high. Observance of Covid-19 protocols in packaging and other industries may add to the cost of goods. Apart from all this, production in almost all sectors is much below the normal levels. All these can contribute to higher prices of goods, which will be reflected in the next Consumer Price Index (CPI) estimates.

There is also a view that the CPI-based inflation may not reflect the real price situation because the consumption patterns of most people have changed during the lockdown months and may remain altered in the near future. It has been estimated that the actual rate of inflation, calculated accordingly, may be about 7%. So, the challenge before the government is to rein in inflation, while keeping the economy, which is likely to shrink as much as 6%, as much above the flood waters as possible. The consequences of a combination of recession and inflation will be especially bad. The only silver lining in the grim scenario is the onset of the monsoon with copious rainfall and normal spread, which will boost farm output and may keep food prices in check. The government will need to stay alert on all these issues.