Rising inflation is a supply-induced problem this year

Why is inflation rising despite slow growth?

While India’s economic activity has remained muted, there has been a consistent acceleration in inflation. We have been seeing this trend since December 2019, and it is essentially an outcome of high food inflation. A surge in food prices are the primary reason for the sharp increase in food inflation, which has demonstrated an upward trajectory of 7.87% in June, 9.27% in July, 9.05% in August and finally 10.68% in September. The high share of food expenditure in our CPI basket results in a significant bearing of it on the blanket CPI inflation figure whenever there is a change in food prices.

What’s influencing the prices of food items?

The increase in food prices have come against the backdrop of a good agricultural season. The present increase in prices are despite surplus production of agricultural produce. Supply disruptions following the covid-19 outbreak and subsequent curbs increased costs. Health safety measures as well as lower capacity may have dampened supply chains to push up food prices. A rise in minimum support price (MSPs) besides aggressive government procurement could also put pressure on food prices. Overall, a confluence of these factors is responsible for jump in food prices even as activity contracts.

Will increasing food price trend become persistent?

For a country that has surplus production in agriculture, high food inflation cannot sustain for long. The increase in MSPs will go back to being modest to keep the fiscal position in check, while supply chains will repair themselves in the next few months. Pandemic-induced increase in costs are also likely to taper off so food inflation is in check once economy starts to recover.

What about the high inflationary fears?

Many have expressed concerns, including some of the erstwhile MPC members, regarding the prospects of high inflation having a permanent impact on inflation expectations that could require the MPC to anchor them using high interest rates. However, the MPC has noted that these pressures are temporary and an outcome of supply disruptions. The average inflation between October 2016 and March 2020 was 3.88% while the average inflation in the last 12 months has been 6.51%. Resolving supply disruptions would be key.

When will things finally start to get better?

Several experts, including some of the MPC members, are optimistic that restoration of supply chains will tame inflation. Indeed, some recent pressures on prices are an outcome of increase in MSPs and supply disruptions. Some have highlighted concerns on the global supply shift from China, which could shore up costs for firms, and subsequently be passed on to the consumers. However, with nominal wage cuts, it is unlikely that demand will outpace supply to shore up prices.

Karan Bhasin is a policy researcher.