BL Explainer: Has inflation peaked?

Has inflation peaked in India?

It’s too early to conclude that inflation has peaked in India. While CPI inflation has been drifting lower since the April 2022 peak of 7.79 per cent, the decline is very gradual. The July reading of 6.71 per cent is also well above the upper limit of RBI’s tolerance band of 2 to 6 per cent. Both the RBI and the Finance Ministry have adopted a cautious tone regarding inflation in their most recent economic reviews. But the level of panic among the people regarding soaring inflation seems to be receding.

RBI’s household survey of inflation expectations shows that households expect inflation to fall, first into the tolerance band of 2-6 per cent and then to the target of 4 per cent. Stock markets are also in a jubilant mood on account of the dip in inflation.

What is causing the prices to cool?

Numerous factors have helped inflation cool slightly over the last few months. Brent crude oil price moved around 20 per cent lower from the peak of around $120 per barrel in March 2022 on easing supply along with fears of a global slowdown. Fall in crude prices has a cascading effect on other goods and services since it brings down the transportation cost.

Prices of steel and other metals also declined sharply since the first quarter due to slowdown in China as well as fears of global slowdown impacting demand. The CRB metal index is down over 26 per cent since April. Agri-commodity prices in India, especially imported oil and fats, have cooled down due to declining international prices as well policy measures such as export restrictions and tweaking of customs duties. Core inflation (excluding food and fuel) has plateaued over the last months around 6.2 per cent.

Is this reduction sustainable?

While there is some hope of inflation cooling further, it is too soon to get sanguine. One, reduction in CPI inflation in June was to a large extent due to favourable base effect; almost 86 bps. Two, while food inflation has declined due to relief in oil and fats prices, spike in inflation in cereals to 6.90 per cent in July from 5.66 per cent in June needs to be taken note of. Cereal prices could hurt in the coming months mainly due to increase in prices of wheat.

Three, while global crude prices have cooled, any escalation in geopolitical tension can send prices upward. Demand from Europe which is yet to fully replace the shortfall created by Russian crude and higher winter demand is expected to retain crude oil prices at elevated levels in the coming months.

Is inflation cooling across the world? What are other central banks doing?

The situation is very similar in other countries as well. While inflation is down a tad, it still rules at multi-decade high. For instance, CPI inflation in the US moved lower to 8.5 per cent in July from 9.1 per cent in June. But this is still a 40-year high and far above the US Federal Reserve’s target level of 2 to 3 per cent inflation.

CPI inflation in the EU was the highest ever at 8.9 per cent in July. Other economies are also in similar straits. It is unlikely that global central banks will take their foot off the pedal in hiking interest rates to control inflation in the immediate future. With global growth beginning to shrink due to high inflation and monetary policy actions, recession or stagflation could well be around the corner.

Does this mean RBI will reduce its pace of increasing interest rates?

The RBI also does not seem ready to let down its guard in the fight against inflation just yet. In the August bulletin, the RBI observed that though “inflation has edged down, but its persistence at elevated levels warrants appropriate policy responses to anchor expectations going forward."

The central bank is likely to keep a close watch on the incoming data on inflation and tailor its responses accordingly.

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