High fuel costs prompting consumers to cut back on other expenses, including on health: Ecowrap

With consumers spending more on fuel, expenses on health are getting crowded out, going by the June 2021 inflation trend, according to a State Bank of India’s (SBI) research report “Ecowrap”.

An analysis of SBI Card spends by the Bank’s economic research department indicates that spend on non-discretionary health expenditure has been substantially reduced to accommodate increased expenditure on fuel.

“In fact, such spending has more than crowded out the spending on other non-discretionary items like grocery and utility services to such an extent that the demand for such products has significantly declined.

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“The share of non-discretionary spend on items like fuel has jumped to 75 per cent in June 2021 from 62 per cent in March 2021,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

CPI (Consumer Price Index) inflation moderated marginally to 6.26 per cent in June 2021 from 6.30 per cent in May 2021. Core inflation also moderated to 6.16 per cent in June 2021 from 6.40 per cent in May 2021.

“The headline inflation was much lower than market expectations and surprised pleasantly on the downside.

“Food items, especially protein items, and oils and fats, though, are still exhibiting increase in prices in contrast with the global trend,” Ghosh said.

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The report observed that the decline in June 2021 inflation print marked the first drop in the index following 12 consecutive monthly increases and was brought about by decline in prices of vegetable oils, cereals and dairy products.

“Interestingly, the decline in June 2021 inflation print reveals an across-the-board decline in sequential momentum. Items in core basket having disproportionately larger weights that had exhibited significant jump in prices in May are now back to trend path,” the report said.

Various leading indicators, including port cargo traffic, freight traffic, railway freight earning, manufacturing PMI, steel consumption have worsened sequentially in June 2021 compared to their levels in May 2021, it added.

Data aberration?

Ghosh observed that, surprisingly, most items in food and non-food have registered a de-growth in June 2021.

“This raises the broader question whether the May 2021 inflation print was a data aberration given that most of the country was under the grip of a lockdown...Interestingly, this is all the more possible as core inflation in May 2021 has undergone a large downward revision,” he said.

Referring to international crude prices going up by $6/ barrel, the report assessed that with every 10 per cent increase in petrol pump prices (Mumbai) there is 50 basis points increase in CPI.

Financial savings decline

Even though inflation has shown marginal decline, the levels are still elevated and combined with a decline in financial savings, are adding to household challenges, opined the report.

According to preliminary estimates by the Reserve Bank of India, the household financial savings rate in Q3 (October-December) FY21 has come down to 8.2 per cent of GDP from 21 per cent and 10.4 per cent in the previous two quarters.

“...Our estimate indicates that during the second wave period (June 2021 over March 2021) the number of districts with deposits outflows might be double than the first wave,” Ghosh said.

Second wave: Fat tail

The report said the second wave of the pandemic is exhibiting a fat tail with daily new cases in India still above 40,000. The 7-Day moving average of daily vaccine doses has come down to 33.7 lakh from a maximum of 60.2 lakh as on June 27, 2021, it added.

“We need to increase vaccination speed to defeat the pandemic. If India speeds up the vaccination rate to 70 lakh per day, then the entire adult population can be covered by the end of FY22,” opined Ghosh.

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