Inflation at 8-Year High of 7.79 Percent – Who Will It Hurt the Most?

[00:00:00] The RBI's unscheduled hike in reparates on 5th May confirmed that the central bank was behind the curve in controlling inflation and now new data released by the National Statistical Office on 12th May shows exactly how behind. Retail inflation in India soared to its highest

[00:00:28] since May 2014 to 7.79 Percent in April, almost double the RBI's mandate of 4% and above the bank's estimates for the 4th straight month. Here are a few numbers to indicate the current state of inflation. Food price inflation is at a 17-month high of 8.38 Percent. Rural

[00:00:45] inflation is at a staggering 8-Year High at 8.38 Percent. And urban inflation at 7.09 Percent is at its highest in 18 months. While the war in Ukraine in consequent rise in fuel prices is a significant factor in the spike, April's high inflation according

[00:01:01] to many media reports is not one-off. So what is driving this inflation? Who will be placed the most in what corrective measures can the central bank implement to control this inflation? To understand this, I spoke to Pallavi Nihata, Associate Editor of Economy at BQ Prime.

[00:01:15] You're tuned in to The Big Story, the podcast where we dissect the headline making news for you and I'm your host, Ahmed. So Pallavi, thank you so much for coming on the podcast. It's always a pleasure speaking to you. Thank you.

[00:01:37] Okay, so my first question was that of course there are not numbers flying around right now. We have food price inflation at a 17-month high. We have rural inflation at 8.38 Percent which is at an 8-Year high. So how is retail inflation actually calculated?

[00:01:55] What are the components of it if you can help us understand that? Okay, so basically it's calculated on the basis of the consumer basket that the MOSP constructs and revises every few years. So that basket in case of India comprises of

[00:02:19] like food and beverages form the largest component of that basket for rural areas, the weightage of food and beverages is almost a little over 54% while in case of urban areas, the food and beverage component comprises about 36%. So on an aggregate about 45%

[00:02:44] is food and beverages. And then there's clothing, footwear, housing, fuel of course, household goods and services, education, personal care. So pretty much everything. It's a sample of pretty much everything that we use in any form on day-to-day basis, goods

[00:03:08] and services. Okay, got it. So what is now driving the current spike in inflation as well? What is it being actually to do? Is it mostly because of Russia and winning Ukraine and the war, the speculation regarding how long the war will be and the

[00:03:25] fears about it as well? So well yes, supply side disruptions because of the Russia-Ukraine conflict have played a role in pushing up inflation locally. So the impact has been seen by way of supply side disruptions for edible oil for instance,

[00:03:47] which are most of which are at record highs. Ata again is at a record high. So in part that is because of supply side disruptions because of Russia's invasion of Ukraine. And otherwise the rise is, you know, because of the rise in global commodity prices

[00:04:09] again one of the factors of which is the Russia-Ukraine conflict. Inflation, the rise in inflation this time has been fairly broad based. So there has been a rise in food and beverages, there has been a rise in price of petrol, diesel, kerosene, LPG because of the

[00:04:32] elections earlier the government had not passed on the entire rise in prices of petrol and diesel because food has remained elevated for quite some time now and those price heights are now being passed on because of which fuel and light transport and communication inflation

[00:04:54] has all gone up. Another indicator we look at is core inflation that excludes food and fuel because these are volatile items but interestingly this time core inflation has also gone up and

[00:05:10] it's nearly at about an eight-year high. So, you know, and this includes other goods and services so you know clothing and footwear, housing all other constituents. So the fact that you know there has been a price rise across categories is what is concerning to a lot of economists.

[00:05:35] Okay, so the big question is that who is going to be feeling the pinch from this inflation as well? Like in your piece you mentioned that rule inflation impact and rule India impact

[00:05:47] urban India impact as well and also can you help us understand the states where inflation is going to hit the most? So inflation is and it has been above the RBI's upper bound of 6%

[00:06:01] since January now and this has been the fourth straight month that it has been above that upper bound of 6%. So, the pinch is being felt by pretty much everyone at this stage especially because

[00:06:16] the rise in prices is fairly broad based and is across goods and services. It's not restricted to any one section but rural inflation has printed higher than urban inflation and that has been the

[00:06:29] trend since several months now. The divergence was particularly high last month for April as well it continued to remain elevated. So, you can say that rural India is facing an even sharper pinch

[00:06:46] with food and beverages, fuel most segments recording higher price rise in rural areas compared to urban. Coming to states, West Bengal saw the highest increase in prices across all states. This was followed by Madhya Pradesh, Telangana, Haryana, Maharashtra. So quite a few states have seen

[00:07:13] inflation in double digits or close to double digits not in double digits. So, West Bengal was at 9.12%, almost that's almost 10%. So yeah, it's been like even here it's been fairly broad based but yes it was the highest in West Bengal this month. So, just past last week the

[00:07:40] RBI also had to report by an awesome 40 basis points as well and they have been speculated by experts that they will go back to the pre-pandemic levels as well. So, there may be an expectation

[00:07:53] of an increase in the report rate again of about 70-75 basis points. So, do you expect that to happen in the next few months because that is one of the ways that the RBI actually

[00:08:06] controls inflation as well? Right, so most economists do expect a rate hike in the next monetary policy committee meet which is scheduled for June and considering that we have had a rate hike just last week that was actually out of turn it was a surprise across financial markets.

[00:08:31] The fact that after yesterday's figures it's even more evident why the monetary policy committee felt the need for an out of turn rate hike and yesterday's figures have if anything cemented economists expectations that there will be a rate hike in June and in policy meets after

[00:08:56] that as well. There is most economists like you said do expect a return to pre-pandemic rates. How the monetary policy committee splits the rate hikes across the next few meets remains to be seen. Like is there anything else that the government can do to control inflation as well?

[00:09:18] Are there any other ways to do it as such? There has been a conversation about how the current rise in inflation is because of supply side disruptions so while the economy may not necessarily not all parts of the economy may be thriving because inflation is where it is

[00:09:39] the RBI is fairly compelled they're left with no choice but to increase rates at this stage. But yes economists do believe that there is need for fiscal measures as well to supplement the rate hike since those might prove to be even more effective considering

[00:09:59] the nature of the current price rise. So to start with there is increasing expectation that at some point the government the center and states might have to do something about the rise in fuel price. We might see a reduction in taxes so yeah that's the expectation to start

[00:10:25] with fuel. There are other supply side interventions that the government is in the midst of for instance for edible prices for edible oil prices for pulses for other you know for wheat for instance

[00:10:43] it remains to be seen what government measures will be. Okay well thank you Palavi for everything and for all the time as well that's what we especially talked with you and for also helping us understand these big comic towns so thank you so much for that. Thank you.

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