Editorial. Inflation is ebbing, but growth uncertainties remain

The latest inflation print in India and the US has given rise to expectations that inflation, in 2023, may not be the scourge it was in the year gone by. India’s retail inflation in December 2022 was at its lowest in a year at 5.72 per cent, having fallen steadily since September, when it touched 7.41 per cent. For both November (5.88 per cent) and December, the inflation rate has fallen below the Reserve Bank of India’s upper tolerance band of 6 per cent. Inflation for the third quarter, at 6.1 per cent, would come as a great relief to the RBI, given that H1 inflation was 7.2 per cent, well above the upper ceiling.

The RBI’s inflation projections are on the basis of an average crude price of $100 a barrel. However, the price of the Indian basket of crude oil has fallen from a high of $116 in June 2022, at the height of the Ukraine war, to $77.75 this month. The RBI argues in a July 2022 paper, “If the Indian basket of crude price increases by 10 per cent, inflation could increase by around 30 bps at its peak, with GDP growth weaker by 20 bps.” With this dynamic no longer actively at work and with consecutive inflation prints showing a declining trend, the central bank has the option of taking a more relaxed view on inflation at its next MPC meeting in the first week of February. Of course, core inflation remains sticky and inflation expectations need to be managed. Indeed, the RBI’s consumer confidence index, mapped in November 2022, reveals a negative outlook on inflation.

Retail inflation in December was driven by cereals (13.79 per cent, essentially due to wheat), clothing and footwear (9.58 per cent) and fuel and light (10.97 per cent), household goods and services (7.43 per cent) and health (6.15 per cent). Interestingly, wholesale price inflation too has fallen from 16.63 per cent in May to 5.85 per cent in November 2022. While cereals and fuel are the main drivers here as well, it is notable that manufactured products inflation at 3.59 per cent in November is much lower than retail inflation in household items, perhaps an indication of inflation expectations. The Monetary Policy Committee, at its next meeting in February, will have to do a tightrope walk between managing sticky core inflation — particularly if the Budget leans towards populism in a pre-general election year — and ensuring that growth impulses are not derailed.

Meanwhile, in the US, December inflation was at 6.5 per cent, the lowest in more than a year. But strong jobs growth data has given rise to doubts over whether the Fed will soft-pedal the rate hike when it meets on January 31-February 1. That said, a peak rate may not be far at hand. That could ease some worries for India on the capital flows and currency fronts, and the imported inflation on that count in 2023-24. The World Bank has recently said that the global economy is projected to grow 1.7 per cent in 2023 and 2.7 per cent in 2024. Much would depend on how China manages its Covid waves and the extent to which that impacts both inflation and growth.

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