Hidden fire

Despite a cocktail of risks — rising global oil prices, a depreciating rupee and festive season demand — which were expected to stoke price rise, India’s latest Consumer Price Index (CPI) inflation numbers paint quite a benign picture of inflation. The year-on-year inflation rate for September 2018, at 3.77 per cent, fell short of both market expectations and the RBI’s projection of 4 per cent for this quarter. So far in 2018, the price of the Indian crude oil basket has shot up by 16 per cent, the rupee has depreciated by over 13 per cent against the dollar and landed costs of industrial raw materials have spiralled. Yet official CPI inflation has dipped from 5.07 per cent in January to 3.77 per cent by September.

But the headline inflation numbers mask the heat that domestic households must already be feeling on the inflation front. The latest September release showed that housing witnessed a 7.07 per cent price escalation over the same period last year, fuel and light inflated by 8.47 per cent, transport costs shot up by 6.42 per cent and clothing/footwear witnessed a 4.64 per cent rise. Yet with a 4 to 8 per cent decline in the prices of vegetables, pulses and sugar, food inflation was curtailed at 0.51 per cent, suppressing the CPI reading. While food products carry a hefty weight of 46 per cent in the official CPI (Combined), most middle-class households have far lower allocations to food, and a far higher budget for housing, transport, fuel and light. Therefore, their actual experience of inflation is likely to be at a huge variance to the official figures. This in fact explains why the households surveyed by the RBI on inflation expectations in October were bracing so strongly for an inflationary spiral; perceiving the current inflation rate at 8.4 per cent and expecting it to shoot up to 9.4 per cent in three months’ time. This yawning dichotomy between official inflation rates and household perceptions may have material adverse implications for consumer confidence, and spending and saving trends in the economy, in the coming months. Nor is the relentless slide in agri-commodity prices good news. Prices of pulses, sugar and horticultural crops defying seasonal patterns to plumb new depths, indicate that the Centre’s many fire-fighting measures to prop up farm incomes from Minimum Support Price increases to special sugar ‘packages’, are having scant impact on the ground.

The sharply diverging price trends within the CPI basket are likely to put the Monetary Policy Committee (MPC) in a quandary on its rate actions in the coming months. If official inflation rates keep undershooting its projections, it will be hard-pressed to act on its stated policy of ‘calibrated tightening’. Yet such tightening may be needed both to retain foreign flows and to stave off looming inflation risks in the non-farm segments of the economy. It may be time to look at a more robust Wholesale or Producer’s price index as a base for inflation targeting.