Inflation risks for the economy

As India trudges out of another series of lockdowns, fuel and food prices are pushing up the inflation rate (chart 1). The headline consumer price inflation rate jumped to 6.3 per cent in May, breaching the upper end of the Reserve Bank of India’s (RBI’S) tolerance band. Although India had witnessed over 6 per cent inflation between April and November last year, it was on account of a low base. This year’s numbers are over a high base (chart 2). Along with fuel other global commodity prices are also rising, resulting in an overall increase in price levels. Zinc prices have, for instance, increased by 48 per cent compared to last June, while copper prices are trending 64 per cent higher. Bloomberg’s commodity index is also trending 46 per cent higher (chart 3). This has also pushed wholesale price index-based inflation rate into double digits. In May, the wholesale price index increased by 12.94 per cent. Prices of metallic minerals went up by 27 per cent, while manufactured products witnessed a 10.83 per cent increase (chart 4).

Analysts expect even the core inflation to remain high for the rest of the year. Elsewhere also, prices have been edging up. In the US, the inflation rate touched a 13-year high of 5 per cent. It is at a two-and-a-half-year high in the EU and the UK (chart 5). While there are calls for rate hikes worldwide, the Indian central bank is also expected to come under pressure if prices do not come down. In its latest policy meeting, the monetary policy committee projected 5.1 per cent inflation for 2021-22. However, analysts predict inflation to be somewhat higher (chart 6). Since the economy is not exhibiting a roaring recovery as many had expected and the pace of vaccination is still slow, advancing the rate cycle would affect the ongoing economic recovery.