Inflation hits middle-income people
Price rise is likely to squeeze demand for both essentials and discretionary goods
NEW DELHI: Higher prices of everything from fuel to goods of daily use are hurting middle income households, according analysts. There is likely to be a squeeze on demand for both essentials and discretionary goods in the coming quarters if prices continue to escalate.
Companies are already reporting instances of downtrading, while consumers Mint spoke to are seeing a dip in savings with expenses rising month-on-month.
In March, retail inflation rose to 7% year-on-year with food inflation moving up sharply causing several households to tighten monthly budgets.
Excessive fuel prices are eating into the family’s household savings, said 26-year-old Upendera Tiwari in New Delhi. The food delivery executive who switched jobs in 2020 said expenses have been on the rise since the beginning of the year. Tiwari could earlier do with ₹100-150 fuel daily. That has now climbed up to ₹200-250 daily. Meanwhile, daily orders and earnings remain stagnant. The family of three is yet to delay any purchases but savings were down to ₹10,000 a month from ₹20,000 pre-covid, he said.
Weeks of conflict in Ukraine has led to a rally in prices of crude oil. For those such as Tiwari whose daily work requires fuel a sudden jump in prices has stretched expenses.
Heightened inflation across fuel, which has a cascading effect on goods and services, as well as high prices of food are coinciding with a sharp recovery in the opening up of markets.
In March, retail inflation rose to 7% year-on-year compared to 6.1% in February and 5.5% in March 2021. This is the highest since October 2020. Food inflation, the most volatile component of the consumer price index (CPI), increased sharply, along with core inflation, ratings firm Crisil said in its note analysing March Index of Industrial Production numbers. Most food commodities saw inflation rise in March, with the sharpest jump in vegetables, followed by edible oils, meat and fish, milk products, cereals, prepared meals, snacks and sweets and sugar products. Clothing and footwear inflation rose for the 11th consecutive month.
The sharp rise in food inflation is likely to have hit the poor to a greater extent as food occupies majority share in their consumption basket, it said.
“Based on this, we estimate the rural bottom 20% and middle 60% of the income segments faced highest inflation at 7.7%. In urban areas, too, the bottom 20% faced higher inflation than other income segments. However, the burden was slightly less than their rural counterparts given the sharper rise of inflation in rural areas,” Crisil said.
Amit Adarkar, chief executive officer at Ipsos India said the recent spike in CPI inflation was worrying, but it was too early to conclude if this was impacting demand in urban India.
“I am worried about rural demand. Sustained higher inflation levels will lead to downgrading and demand erosion in rural India and that may be long lasting, unlike in urban India. Most consumer companies have focused on value growth by raising prices or downgrading pack sizes for the time being. If inflation continues at more than 7-8% for one or two months, volume growth in the second quarter will get affected,” Adarkar said.
Inflation is coinciding with a rebound of economic activity, Adarkar said. The formal sector is giving good salary hikes and informal sector activity is up significantly. “The real impact of inflation on demand in urban India may not be visible for 1-2 months,” he said.
On Thursday Refinitiv-Ipsos Primary Consumer Sentiment Index reported a dip in consumer sentiment among urban Indians in April 2022. The sentiment has lowered across the four sub-indices it track including jobs, current financial conditions, investment climate as well as economic expectations..