Economy

Telangana records the highest retail inflation in May, Kerala the lowest

Shishir Sinha | | Updated on: Jun 15, 2022

Higher WPI, unfavourable base effect likely to push national retail inflation rate from July

Telangana leads the clutch of 11 States that have higher retail inflation than the national headline number for May, while Kerala recorded the lowest.

Retail inflation based on the Consumer Price Index (CPI) dropped to 7.04 per cent in May from 7.79 per cent in April. A reason for the dip is the favourable base effect. Experts now say that after it has waned once, retail inflation is likely to go up again. At the same time, higher producer’s inflation is also expected to push retail inflation further up. Producer’s inflation is based on the Wholesale Price Index (WPI).

Data released by the National Statistics office showed that most of the big States recorded higher inflation rates than the national rate. For example, Telangana recorded a retail inflation rate of 9.54 per cent, followed by Maharashtra and Andhra Pradesh. One reason for higher inflation in these States could be revenge consumption, especially in the services sector. Also, disruption in supply pushed the price level higher with demand.

Interestingly, the retail inflation rate in Kerala was 4.82 per cent, which is the lowest among 22 States and union territories. It appears lower remittances affected demand in the State. Tamil Nadu and Karnataka also recorded retail inflation lower than the national headline.

Inflationary Road Ahead

Though many experts feel that retail inflation has peaked, there are some who believe that there is still some pain in store. One big reason is the 41-year high wholesale inflation rate. DK Srivastava, Chief Policy Advisor with EY India, said that the May 2022 WPI inflation rate at 15.9 per cent signals continued upward pressure on CPI inflation in the next few months. This inordinately high WPI inflation is driven mainly by two commodity groups, primary articles which include food items as well as crude and fuel, and power which includes electricity and mineral oils.

“Some State electricity boards have recently revised their tariffs upwards. With a high WPI inflation, implicit price deflator (IPD)-based inflation will also be driven up, implying buoyant tax revenues in the first quarter of 2022–23,” he said.

Dharmakirti Joshi, Chief Economist with CRISIL, said the outlook on retail inflation continues to be worrisome as weather shocks have added to the already existing factors such as high international commodity prices in raising supply-side pressure on the economy. “It is set to rise again once the favourable base effect wanes from July,” he said.

The unprecedented heatwave impacted production of foodgrains, vegetables, and spices this year. Further, international prices stayed elevated for a wide range of agricultural, energy, and industrial commodities, which will put broad-based pressure on food, fuel, and core inflation. Prices of crude oil have shot up even further to $120/barrel after the European Union’s partial ban on Russian oil.

According to Joshi, CRISIL Research now expects Brent crude to average $105-110/barrel in FY23 compared with $80 last year. Producers, who have been reeling under severe cost pressures since last fiscal, will be forced to pass them on to retail prices. RBI’s latest surveys of manufacturing, services, and infrastructure sectors show expectations of a further rise in input and output prices going forward. Due to these factors, “we expect CPI inflation to rise to 6.8 per cent in FY23, compared with 5.5 per cent in the previous year.

Published on June 15, 2022
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