Persistent inflation continues to erode purchasing power

The just-released August figures show retail inflation has risen significantly to 7% from 6.7% in the previous month. This is worrisome as the decline in inflation over the last three months has reversed sharply on the back of rising food prices. Though fuel inflation somewhat softened to 10.78% from 11.76% with the drop in international crude prices, food inflation in August 2022 rose sharply to 7.62% from the previous month’s 6.75% as vegetables, pulses and cereals moved up. It appears the government’s anti-inflationary measures, like the ban on wheat exports in May, are not working. This is the eighth consecutive month in which the retail Consumer Price Index (CPI) has held up beyond the tolerance band of 2–6% and reflects the hardship the poor are bearing from spiralling food prices.

The increase in the inflation rate in August will only harden the Reserve Bank of India's policy of increasing the interest rates on borrowings to bring down the money supply and thereby tame inflation. RBI has raised interest rates by 1.4% in tranches so far this year. This is not good news for growth and production, which ride on an easy and cheap flow of credit. It’s a double whammy, too, as industrial production simultaneously slowed in August. The National Statistical Office announced that the Index of Industrial Production had fallen to 2.4% in July from 12.7% in the preceding month, mainly hit by lower mining output (-3.3%).

The crucial question is: will the government’s counter-measures work? After it banned wheat exports in May, the Centre has now stopped all exports of broken rice and imposed a 20% duty on the export of various grades of rice from September 9. Edible oil and steel prices too have been reined in. However, the erratic and deficient monsoons have lowered production and perhaps even delayed rabi planting.

Economists are therefore predicting the above 6% inflation rate will persist for some time and may only see a reversal in Q4—the January-March period next year. More worrisome is the fact that the inflation rate in rural areas is higher at 7.15%. Such high inflation over a prolonged period of time significantly erodes the purchasing power of the people and increases their pain; it, therefore, calls for more intense intervention by the State.