April retail inflation is not the perfect input for policymaking
Premium- Retail inflation needs close monitoring but for now the Reserve Bank of India can concentrate on mitigating the second wave’s impact on the nascent economic recovery
In all respects, India’s retail inflation for April would be looked through by policymakers. The headline print has not only come according to the trajectory forecasted but is also rife with statistical imperfections.
Recall that April last year was under strict nationwide lockdown. That meant economic transactions were bare minimum and restricted to only basic essential goods. The effect was two-fold. One, the prices of essentials rose, partly because an unprecedented lockdown created supply disruptions. Two, transactions beyond essentials were absent and therefore no data could be collected.
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The government’s statistical department had to resort to extrapolation to stitch up a consumer price index (CPI) for April and May 2020. Some of the assumptions in this exercise have been questioned too.
The 4.29% print of CPI inflation for April should be seen, keeping these factors in mind. Indeed, the April and May data would have little value in determining the trend of inflation in the coming months.
That said, there are some insights to be gleaned from the granular details. According to economists, more than the year-on-year metric, the month-on-month momentum may hold some key answers.
Here, the momentum in food inflation has increased marginally even though vegetable prices seem to be under check. But those of fruits and non-perishables such as cooking oil and pulses firmed up. On the other hand, the momentum in core inflation has picked up sharply to 0.61% in April from 0.17% in March, partly because of a rise in prices in the personal care category. Analysts believe that the pressure on core inflation continues to remain.
“The extent of translation of input price pressures, manifested in recent high WPI non-food manufacturing (core) readings, further supply and demand impact of the second wave of covid infections and possibly slower disinflation in the food basket need to be watched, but base effects will aid year-on-year readings in the next few months," said Sreejith Balasubramanian, economist at IDFC AMC Ltd in an e-mail response.
The risks to inflation from the second wave and the ensuing lockdowns cannot be ignored. As such, input cost increase, and supply disruptions due to lockdowns may keep inflationary pressures intact. Madhavi Arora, lead economist at Emkay Global Financial Services Ltd believes that besides these risks, a return of pricing power in the second half of FY22 would also put pressure on prices.
Notwithstanding the April data, analysts believe that inflation will average at 4.5-4.7% in FY22 as against 6.2% in FY21. Retail inflation needs close monitoring but for now, the Reserve Bank of India can concentrate on mitigating the second wave’s impact on the nascent economic recovery.
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