Price of things

The rise in retail inflation in March was driven primarily by food items — the consumer food price index rose to 7.68 per cent, up from 5.85 per cent the month before. Much of this rise can be traced to vegetables, meat and fish, edible oils, and cereals. But what is equally worrying is that core inflation, which strips away the volatile food and fuel component, has also witnessed a rise. In fact, increases were observed across both goods and services — from clothing and footwear to personal care, heath services and others. This suggests that inflationary pressures are broad-based and are getting firmly entrenched in the economy. As a report from ICRA notes, in March, 78 per cent of items in the CPI basket “witnessed a sequential increase in prices”, up from 68 per cent in January.

In its recent monetary policy committee meeting, the central bank had projected inflation at 6.3 per cent in the first quarter (April-June) of the current financial year, moderating mildly thereafter to 5.8 per cent in the second quarter (July-September). However, the trends in prices so far suggest that these projections are likely to be overtaken. According to a report from Kotak Economic Research, “high frequency prices for April indicate further increase in prices of cereals, pulses, fruits and vegetables”. Moreover, the rise in retail petrol and diesel prices will only add to the inflationary pressures. While in its recent policy meeting, the MPC’s priority had shifted to inflation management, this inflation shock is now likely to bring forward its timelines for tightening of policy. These price trends not only increase the chances of the MPC changing its stance from accommodative to neutral in its next meeting in June, but also increase the odds of the committee hiking interest rates more aggressively to tackle vaulting inflation.