Data Focus. Why inflation in India is likely to be less transitory than in the US

The surge in inflation has been in focus over the last few months since the monetary policy of central banks is closely tied to this number. The headline CPI inflation in India at 5.58 in July, cooled somewhat from the reading of 6.25 per cent in June, but the RBI monetary policy committee’s forecast of 5.7 per cent inflation for FY22 shows that prices may not decline significantly.

While the inflation number in India is considerably off the recent high of 7.6 per cent recorded last October, the urban CPI inflation in the US has begun accelerating sharply since April, poised at 5.36 per cent in July, a 13-year high. Inflation in core consumption expenditure in the US is at 30-year high, at 3.5 per cent.

The rhetoric of both the central banks is similar. Both the Federal Reserve and the RBI have been sticking to the statement that inflation is ‘transitory’ and will cool down in the coming quarters. An analysis of the top drivers of inflation in the US and India show that inflation in the US is more impacted by unlocking of the economy after the pandemic, and hence can turn out to be transitory.

But Indian inflation seems due to structural factors, that may not be controlled that easily.

Different drivers

A common driver of inflation for both the US and India is surge in energy prices. The recent stalemate in the OPEC-plus nations on increasing crude oil production had taken global crude prices beyond $75 per barrel. The inflation was exacerbated by prices being quite low, close to $40 per barrel last July. Inflation in energy basket was 23.6 per cent in the US in July while India too experienced inflation of around 23 per cent in petrol and diesel.

Decline in crude oil prices with higher supply, coupled with the base effect wearing off, is likely to provide relief in inflation in this category going ahead.

Unlocking theme

We compared the constituents of the US and Indian CPI inflation that have registered the maximum increase in July, to see if there are any other similarities in the drivers.

Car and truck rentals increased 73.5 per cent in the US and selling price of used car and trucks increased 41.7 per cent. These seem to be linked to unlocking of the economy as people begin holidaying and travelling more. Rates of hotels and motels have also surged 24 per cent and private transportation has increased 19 per cent indicating that the ebbing of Covid-19 seems to be driving inflation in many constituents in the US. These prices can cool down over the next one year or so.

The unlocking theme and supply bottleneck is evident in India as well with rates for barbers and beauticians surging 191 per cent. But the main pain point in Indian CPI is edible oil (32.5 per cent) and pulses (9 per cent). Prices of pulses such as moong, urad and tur have been elevated since last year due to supply-side bottlenecks, but these prices can ease as imports are allowed and output increases. But the inflation in edible oil is more structural with a large gap between demand and supply in the country. With global prices of edible oil moving higher, the inflation in this basket can continue to pinch, making inflation more lasting. The national edible oil mission will take time to bear fruit and until then, CPI will continue to haunt policy makers.

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