The latest press release by the Ministry of Statistics and Programme Implementation issued on 12 th December reports the retail inflation rate at 5.5 per cent for November. Headline inflation remains below RBI’s 2 to 6 percent tolerance. The report identifies an increase in the price of essential food items and an adverse base effect as critical factors leading to a spike in the inflation rate. However, my ‘investor-minded’ readers need not worry as market sentiments may not be affected much as long as core inflation remains stable.
The inflation rate is measured in terms of an increase in the consumer price index (CPI). CPI captures a fixed basket of goods and services, which includes food, clothing, housing, fuels and medical care. Food and fuel take up a huge chunk (about 60 %) of the Indian CPI. While in the US and the UK, weightage for food and fuel is around 13.2 and 9.5 percent, respectively. Hence, India’s CPI relies heavily on fuel and food prices. Recent global and climatic conditions have resulted in a surge in both.
India imports about 80 per cent of its fossil fuel demand. The global supply chain disruption due to the Russia- Ukraine war increased crude oil prices this year. The government tried to mitigate the inflationary pressures due to the same by introducing a sharp cut in the central excise duty on petrol and diesel earlier this year. Rising fuel prices can also affect broader economic activity as many production activities are centered around crude oil. The RBI has also kept the repo rate unchanged at 6.5 %.
Another driver of increasing inflation is rising food prices. A look at the trajectory of food inflation is quite insightful. Food inflation stands at a staggering 8.02 per cent. Such a rise can be attributed to a frail monsoon due to El Nino. El Nino had triggered a five-year low in the amount of rain India received this year. Bad monsoons directly affect agricultural produce, which in turn affects the CPI. Policies that curb hoarding and assure food availability are essential.
Numbers like 6 and 8 per cent increase in retail prices might not affect most of you. A good percentage of my readers won’t notice such changes as they step out into the market. How does another 5 or 10 increase matter right? However, it does matter to most of India’s population, which explains why food inflation always has a strong sway during elections. The 1980s Onion election is a testament to that. The El - nino is also notoriously famous for its effect on the ballot. It will be interesting to see how rising inflation and the El Nino effect play out during next year’s general elections.
Picture Credit - https://www.deccanherald.com/business/retail-inflation-in-july-rises-to-744-from-487-in-june-govt-data-2647087
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