2 min read.Updated: 13 Oct 2020, 09:04 PM ISTAparna Iyer
Urban retail inflation in services was 7.74% in September while rural came in at a lower 6.12%
One of the reasons why inflation ha been driven by urban areas lately, is that cities and smaller urban centres were hit the hardest by lockdowns
The surge in retail inflation in September was anticipated by markets as well as policymakers.
Ergo, an uncomfortably high 7.34% headline print did not perturb anyone. After all, the rise came from the usual suspects—vegetable prices and sticky core inflation. However, India’s retail inflation, when broken down in parts, tells a story that policymakers should focus on if they want a trouble-free recovery.
If the month-on-month trend is anything to go by, India’s villages saw a higher jump in inflation than urban centres in September. This was expected, considering that rural centres have shown more resilience than urban India in terms of demand. However, that is just a part of the whole picture.
Since the onset of the covid-19 pandemic in February, price pressures that form sticky core inflation have been driven by urban centres. As such, core inflation, which includes most of the services sector, has remained an urban phenomenon of late. The pandemic seems to have exacerbated the problem.
Urban retail inflation in services was 7.74% in September, while rural came in at a lower 6.12%. Core inflation has seen a sharper climb in urban centres since July. The more volatile fuel inflation has also been largely driven by urban centres.
There are many reasons why inflation is driven by urban areas of late. Cities and smaller urban centres were the hardest hit by the lockdowns. The progressive relaxation has meant business activity has quickly resumed. Further, service providers were able to pass on the additional cost of social distancing and hygiene to consumers through a small levy. “What’s keeping core inflation elevated is telecom price hikes last year and a second round impact of the large hike in retail fuel prices on bus fare, taxi, etc. Thus higher inflation in a few core components is reflective of cost-push pressures rather than demand pressures," wrote analysts from Edelweiss Securities Ltd in a note to clients.
That said, consumption demand is yet to revive fully in urban centres and hopes are riding on the festive season. Core inflation on the whole has softened over the past six months, which shows lack of demand.
As such, the surge in September inflation was primarily led by vegetable prices. Economists expect these to cool off in the coming months. Since food inflation is expected to ease, the Reserve Bank of India (RBI) was right to look through the near-term rise in retail inflation.
However, the central bank’s old foe, India’s core inflation, is yet to be tamed. For that to happen, the urban-driven pressures should ease.
In its monetary policy report, RBI has said that divergent rural and urban inflation trends tend to converge over time. The key question for the monetary policy now is whether urban inflation would come down to meet the rural curve, or vice-versa.
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