Why is India’s inflation risk increasing?

Inflation is referred to as a necessary evil because it is required for economic growth while no one loves it. Inflation that is too high might cause severe challenges for policymakers. In April 2021, both wholesale and retail inflation increased month over month, while the former increased at a far faster rate. Furthermore, there is a potential that it will grow even higher.

For the first time since 2010, wholesale pricing index (WPI)-linked inflation reached double digits in April 2021, at 10.5 per cent year on year (up from 7.4 per cent in March). Inflation in the consumer price index (CPI) fell to 4.3 per cent in April from 5.5 per cent in March, owing to a high base from the previous year (it had spiked to 7.2 per cent in April 2020). However, because data collecting was hampered in April and May 2020, last year’s base may not reflect actual trends. A month-by-month comparison may help put things into perspective.

The steep rise in commodity prices around the world is a significant contributor to India’s rising inflation. As a result, the cost of importation for several critical necessities is rising, pushing inflation higher. In May 2021, Brent crude prices surpassed $65 per barrel, more than doubling from the previous year. In April 2021, the price of vegetable oils, a significant import, jumped 57 per cent to a decadal high. Metal prices are nearing a ten-year high, and international freight costs are rising. “The rising WPI trend is showing up in manufacturing costs, particularly in the chemicals, paper, and textile sectors,” said Dharmakirti Joshi, Crisil’s Chief Economist.

Food inflation, while currently contained due to declining vegetable prices, has the potential to rise. Food prices have been steadily increasing over the world. Due to local lockdowns, Mandi arrivals have been hampered. According to Crisil, consumer durables inflation has picked up steam, with metals as significant production inputs. However, sequential inflation in FMCG, which represents 9% of the CPI basket, has moderated since the start of CY2021. Although these are in line with forecasts, things could change. “Producers are carrying a greater share of the expense of increased inputs than consumers. However, as demand picks up, these expenses may be passed on to consumers more frequently,” Joshi said.

According to Crisil, CPI inflation is expected to fall to 5% this fiscal year from 6.2 per cent last year. This was predicated on lower food inflation, which benefited from last year’s high base, and a regular monsoon. However, inflation risks to the upside are increasing. Supply problems caused by the second COVID wave in rural India add to inflationary pressures on top of rising ingredient prices. These are the primary causes behind the shift in forecasts.

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