Inflation will fall in December, but worries remain
Inflation in India, as measured by the Consumer Price Index (CPI) has continuously been above RBI’s upper tolerance band of 6% for the past eight months until November. To be sure, inflation peaked in October to 7.61% and had fallen to 6.93% in November. The National Statistical Office (NSO) will release December CPI figures on January 12. A Reuters poll of economists expects inflation to fall to 5.3% in December 2020. Here are five factors which could affect inflation going forward:
Vegetable prices have come down significantly
Food, especially vegetable prices have played an important role in the recent inflationary phase. Food inflation has a share of 39% in the CPI basket. Vegetables alone have a share of 6.04%. During the April-November period when CPI has grown at 6% or more, food inflation growth has been at least 9%. It has grown in double digits in three out of eight months. Annual growth in vegetable prices has been in the 4%-23% range in this period as price growth had crashed initially to below 6% in the months of May and June before rising back to above 11 % from July onwards. An HT analysis of vegetable prices and arrivals in Delhi’s Azadpur market suggests that a sharp month on month and year on year fall in vegetable prices in December could weaken an important source of tailwinds to retail inflation.
Daily price and arrival data from Azadpur market shows that prices of two out of three most important vegetables (potato and onion) except tomato have fallen in December 2020 compared to last year as well as previous month. One of the reasons for the fall in vegetable prices could be a better crop this year, which is reflected in higher arrivals in the market. That the government removed restrictions on onions exports on December 28 also suggests an adequate supply in the domestic market. Seasonal vegetables like spinach, methi and carrot have seen fall in prices as average daily arrival in December 2020 improved compared to last year. If this trend continues, food inflation should ease out going forward.
Bird flu scare could lead to a crash in poultry prices
Ten states in India have reported an outbreak of bird flu so far and the intensity and geographical spread of the disease could rise in the days to come. Outbreaks of bird flu are generally associated with a sharp fall in consumption of poultry products such as chicken and eggs. While this leads to windfall losses for those in the poultry business – there is large scale culling of poultry stock or closing of markets where it can be sold – it could lead to sharp fall in prices and generate additional headwinds for food inflation. The egg, meat and fish component of CPI basket has been rising at a fast rate in the post-Covid period. In November 2020, the sub-categories of meat and fish and eggs saw an annual growth of 16.7% and 20.3% in inflation. While the December inflation could still be higher for this particular sub-category, there could be a big fall in January. With a share of 4% in the overall CPI basket, meat, fish and eggs category matters more than pulses, which has a share of 2.4%.
But a broad-based inflationary phase in food prices could compensate for these developments
To be sure, it is likely that overall food inflation could continue to be stickier than what one would have expected in the backdrop of strong headwinds in vegetable and poultry prices. This is because the current phase of food inflation is more broad-based. Overall food inflation in the month December 2019 was at 14.19% and in November 2020 it was just 9.43%.However, while food inflation in December 2019 was largely driven by rise in vegetable prices (as they had increased by 60%), increase in food prices in November 2020 was more broad based. Apart from vegetables, prices of other sub-categories - pulses and products, oils and fats, egg, fish and meat and spices have also shown double digit inflation in November 2020.
Increasing crude prices could act also fuel inflation going forward
International (Brent) crude oil prices have increased in the last two months and are at a 10-month high of around $56/barrel. The Indian government which had increased excise duty on petrol and diesel in March and May 2020 after the crash in crude oil prices (in order to increase its revenue collection) has not brought down these taxes even after increase in recent crude prices. According to transport operators, diesel prices comprise around 65% of their operational cost. Rising crude prices along with higher government taxes could increase inflationary pressure going forward with increase in goods transportation costs.
Will core inflation come down as quickly as food inflation?
While food prices could show a moderation December onwards, it is uncertain whether core inflation, which is the non-food non-fuel component of the CPI basket, would come down. Core inflation actually increased in the month of November even though food prices and the headline inflation number came down. This is why experts are worried about the inflation trajectory in the economy.
“For three reasons, it is possible that services inflation rises quickly in 2021. One, as a vaccine comes into play, there could be a release of pent-up demand for high-touch services. Two, as large firms and their employees do relatively well, they are likely to demand more services, stoking prices. Consumption patterns show that the rich in India tend to consume more services than the poor. And rising inequality could, therefore, stoke inflation. Three, many service providers did not do a regular annual price reset in 2020, so they may raise prices to cover the two years once demand picks up. If inflation does become persistent and leads to tighter monetary policy that could weigh on growth over time”, said Pranjul Bhandari, Chief India Economist at HSBC Securities and Capital Markets (India) Private Ltd. in a note released in December last year.
Enter your email to get our daily newsletter in your inbox
- Income tax refund (ITR) status can be checked on the National Securities Depository Limited (NSDL) website as well as on the income tax department’s e-filing site.