The Reserve Bank of India (RBI) raised key policy rates in a surprise mid-cycle review on May 4 in a bid to anchor inflation expectations and contain second-round effects.
The RBI’s monetary policy committee (MPC) fears that inflation will remain elevated in the near term due to the worsening external environment, elevated commodity prices and persistent supply bottlenecks. Many economists have said that the RBI has been behind the curve in addressing the risk of rising inflation in the economy.
The consumer price index (CPI) breached the RBI’s comfort zone all through the fourth quarter of 2021-22 and was on course to rise at a faster clip in April after climbing 6.95 percent in March 2022 from a year ago, its sharpest rise since October 2020 when it climbed 7.6 percent.
The CPI data for April is to be published later this week.
Soaring petroleum product prices following the Russian invasion of Ukraine is not the only reason for the rapid rise of inflation in recent months.
Edible oil prices are on the boil due to a fall in the availability of sunflower oil from Ukraine and the rise in the prices of palm oil.
Pass-through of higher input costs are set to make manufactured products more expensive. Drug manufacturers are taking a 10 percent increase in medicine prices due to the rising cost of key pharmaceutical ingredients.
Inflation had been rising even before the East European crisis due to the supply-chain disruptions caused by the coronavirus pandemic and demand outstripping supply for various commodities.
We look at the key components of the consumer price index that put upward pressure in the last year even as the RBI maintained an accommodative stance.
The consumer price index for oils and fats was 27.4 percent in 2021-22 compared to the previous financial year. Retail prices of edible oils began to climb soon after the national lockdown was lifted after the first wave of the pandemic.
Retail prices of all popularly consumed edible oil are about 50 percent higher than they were in December 2020. For instance, a kilo of mustard oil is retailing at Rs 190 on an average against Rs 137 in December 2020. A kilo of sunflower oil is retailing at Rs 188 against Rs 129 in December 2020.
Fuel and light
The consumer price index for the fuel and lights group climbed 11.3 percent in 2021-22, from a year ago. Fuel and light include charges for LPG and other cooking fuels and electricity but do not include expenditure on petroleum products used by households to run their vehicles.
A non-subsidised household LPG cylinder of 14.2 kg was priced at Rs 594 in Delhi in December 2020, after the cooling of petroleum prices lowered the retail price from Rs 860 just as the pandemic set in. It now costs about Rs 1,000 in Delhi and several other markets.
Transport and communication
This is a sub-group within the household goods and services group. The consumer price index for this sub-group climbed 10.1 percent in 2021-22.
Petrol prices rose from less than Rs 84 a litre at the end of December 2020 to more than Rs 105 in Delhi. Similarly, diesel rose from about Rs 74 to almost Rs 97 a litre during the same period.
Communication charges have also climbed, as mobile service providers raised tariffs for pre-paid customers. A majority of mobile phone users have signed up for pre-paid plans.
Airfares have also risen sharply from the levels prevailing before the pandemic, lifted higher partly by the government’s prescribed price bands that set a floor for fares and partly by the soaring cost of aviation turbine fuel.
Processed and prepared food
Within this broad category, non-alcoholic beverages comprising coffee and tea reported an 11 percent increase in the consumer price index in 2021-22.
Processed tea prices rose sharply after the national lockdown and stayed elevated till early 2021-22. Similarly, coffee prices climbed after the nation-wide lockdown and continued to stay elevated through most of 2021-22.
The consumer price index for prepared meals such as parantha, dosas, samosa, noodles and bakery and confectionery, climbed 6.1 percent during 2021-22.
FMCG goods makers such as Hindustan Unilever and ITC among others increased prices of their ready-to-eat offerings to offset a rise in raw material costs. Prices of breakfast staples, including, bread have been raised more than once since the pandemic set in. With wheat and edible oil prices climbing, companies are bound to increase the retail selling price of their products.
Household expenses on healthcare have also risen faster in 2021-22 than in the preceding year. The rise in healthcare expenses averaged 7.5 percent in the last financial year.
With medicines prices, including the essential ones, set to climb by an average of 10 percent, households are set to see their healthcare bills rise in the months ahead.
Households have also been hurt by the rise in prices of staples. While the rise in CPI for cereals and their products was modest at less than one percent during 2021-22, pulses rose about 6 percent. The rise in wheat prices in recent months due to increased demand for exports is set to hurt households.
Households would have felt the pinch of higher prices of fruits and eggs, with the index for these items climbing 6.2 percent and 7.6 percent, respectively, during 2021-22.They would also have felt the pinch of higher prices of clothing and footwear, as the index for these discretionary spends climbed more than 7 percent during 2021-22.