Covid-19 impact: Inflation may remain high for a few months, say economists

Local lockdowns, taxes on fuels, services, hardening commodity prices may drive up inflation: Economists

The consumer price inflation (CPI) rate may remain elevated for at least a couple of months more owing to supply-side distortions created by regional lockdowns, taxes on fuels imposed by the Centre and states, commodity prices firming up, and services becoming costlier.

“I am not expecting prices to come down materially for the next couple of months,” said Soumya Kanti Ghosh, group chief economic policy advisor, State Bank of India (SBI). He said the food basket was moving the consumer price index (CPI) more than services, which were not being consumed that much by the people.

Food has more than a 46 per cent weighting in the CPI. Food prices cannot decline in the next couple of months because of the way the states are handling the lockdown, he said, adding, there is no planning in it. Some say a bumper food harvest should reduce the prices, but it should reach the market, Ghosh said.

He said non-food items could also see price pressure because of financial markets’ volatility, and the firming up of commodity prices. “Prices will decline towards the end of the year,” he said.

The CPI inflation rate remained above 6 per cent in each month of the first quarter of 2020-21. However, the Reserve Bank of India (RBI) did not reckon on the imputed value of the CPI given for April and May by the Ministry of Statistics and Programme Implementation (MoSPI).

“For the purpose of monetary formulation and conduct, therefore, the MPC (monetary policy committee) is of the view that CPI prints for April and May can be regarded as a break in the CPI series,” the RBI had said in a statement on Thursday.

Ghosh said the RBI’s stance was correct. He also disputed the 6.1 per cent inflation rate released by MoSPI for June, saying it would be 6.9 per cent. Food demand going up in the month was not captured by MoSPI, he said.

CARE Ratings Chief Economist Madan Sabnavis said the inflation rate would be 5-5.5 per cent for the most part of the year.

“Even though we have a very good kharif crop, we are paying much higher prices for food items than earlier,” he said.

He said the non-food inflation rate would go up because prices of crude oil globally had started increasing and both the Centre and the states were adjusting taxes to make up for the shortfall in revenues. “Even though crude oil prices may end up lower at global level, we may pay higher prices because of taxes,” he pointed out. The Centre had raised taxes on petrol by Rs 10 a litre and on diesel by Rs 13 a litre in May, followed by some states including Delhi and Punjab.

Sabnavis said services, which have over a 28 per cent weighting in the CPI, might increase prices when the sector opened up. “We have seen this happening in airlines, education, and health.”

Aditi Nayar, principal economist at ICRA, presumes the rate to have hardened in July, led by the spike in vegetable prices, elevated fuel prices, and disruption caused by localised lockdowns.

“Subsequently, the rate would soften somewhat in the next few prints, and then plunge,” she said. The RBI had said the headline inflation rate might remain elevated in the second quarter but moderate in the second half. It had also said that the inflation objective was being stymied by the spike in food prices because of floods in eastern India and lockdown.