RECOVERY...

“A food-fuel driven inflationary spike will burden the poor disproportionately and squeeze their purchasing power. This is bound to have an adverse effect on aggregate demand, pricing power of sellers and therefore growth,” said Himanshu, an associate professor of economics at Jawaharlal Nehru University. “Because cost of cultivation will rise sharply compared to the official projections which were made in March 2021, Minimum Support Prices will lose their remunerative cushion, generating headwinds for rural demand,” he added.

While the magnitude of jump in both retail and wholesale prices has an element of surprise, the trend was expected. Petroldiesel prices were kept frozen during the state election cycle in March-april. They have been increasing continuously since May because of rising crude prices and the reluctance of the Centre and the state to cut levies that account for almost 61% of the price of petrol and 54% of that of diesel (in Delhi).

But crude is not the only primary commodity to have experienced a price surge. The Bloomberg Commodity Index, where energy related items have a weight of only 30%, increased from its January 4 value of 78.63 to 94.5 on June 14.

The food component of CPI -it has a weight of 39% in the overall CPI basket -- grew 5% in May, a sharp jump from its April value of 1.96%. The food component of WPI grew at 8% in May.

What is remarkable about the latest surge in the food component of CPI is that this is happening despite a contraction in cereal and vegetable prices, which have a weight of 40% in the CPI food basket. The main driver of food prices are edible oils, with the oil and fat index growing at 30.8% in May 2021.

Edible oil prices have been growing at double digits for 14 consecutive months. But even core inflation, which does not include food and fuel, rose 6.57% in the month, the highest in almost seven years.

While part of the WPI spike is the base effect -- it contracted by 3.4% in May 2020, in a month when everything was locked down -- at 132.7, the 2021 number is higher than even May 2019 value of the index (121.6).And primary commodities aren’t exclusively to blame. The manufactured goods component of WPI, which accounts for nearly two-thirds of the WPI basket, grew at an all-time high of 10.8% in May. “Elevated prices in the manufacturing segment are indicative of strengthening pricing power of manufacturers,” Madan Sabnavis, the chief economist at CARE Ratings, said in a note.

An analysis of the results of 1,481 companies that made a net profit of ₹1.8 lakh crore in the quarter ending March 2021, by Mahesh Vyas, managing director of Centre for Monitoring Indian Economy (CMIE), echoes that sentiment: “Profits have increased entirely because of an increase in profit margins. This is true although March 2021 was the first quarter when the topline was distinctly higher than its year-ago level after six quarters.total income of the 1,481 listed companies in the March 2021 quarter was 14.5% higher than it was a year ago. Yet, this barely contributed 0.2% to the increase in profits. Growth in profits came from the huge jump in profit margin,” he said in the analysis published on the CMIE website.

But that may not last. According to a Boston Consultancy Group (BCG) survey, summary findings of which were available at the CMIE website, “58% of consumers think their income in the next six months will be lower than pre-covid levels. Similarly, 51% consumers expect their spends over the next six months to be lower as compared to 40% in the last round of the survey.”

It added: “This decline in income sentiment is steepest among the less affluent income groups and those in small towns.”

Put otherwise, the latest inflationary numbers could cloud the optimistic outlook around economic recovery as lockdown restrictions are removed.