November readings for wholesale and consumer price index, the first at a three decade high and the second at a more modest three-month high, are a cause for concern. They raise questions over whether the Monetary Policy Committee’s projections for retail inflation will hold. A 14.2 per cent spike in WPI last month was marked by a 39.8 per cent rise in fuel and power prices and an 11.9 per cent rise in manufactured products. Meanwhile, November’s retail inflation of 4.9 per cent is marked by just a 2.6 per cent rise in the food and beverages basket (contrary to popular perception), which accounts for 54 per cent of the CPI weightage. Clearly, a complex medley of factors are at work — global and domestic; circumstantial (food and fuel) and, perhaps more so, structural. There can be no downplaying the role of imported inflation — not just through fuel, but also non-oil, non-gold imports — in an economy where imports account for well over a quarter of the GDP. It is not possible to really control imported inflation. Worries over the impact of the Fed’s withdrawal from bond purchases on the rupee are already being voiced, although India has the forex firepower. A weaker rupee at a time of high commodity prices can complicate matters with regard to inflation.

Back home, the role of structural factors cannot be underestimated. After taking into account the spurt in vegetable prices due to unseasonal rain and the more disturbing rise in edible oil prices, it must be acknowledged that a more deep-seated price increase might be setting in — core inflation, led by transport and communication, clothing, recreation and health. This is inflation of a sticky sort. Health and recreation costs will not fall the way prices of vegetables do. In aviation and telecom, tariffs have been raised, and these will have knock-on effects. In a complex and evolving scenario, it is hard to say whether MPC’s projection of muted demand (“a slack in the economy muting the pass-through”) keeping prices in check will hold true. Any improvement in private consumption demand may enhance pricing power. For example, monetary policy pushing cheap loans for housing and auto could impact raw material costs generally.

The inflation arising out of the pandemic is a complex interplay of supply and demand factors; central banks and governments are struggling for answers. The former are tightening policies to check rising headline inflation. Real interest rates in the US are down to nearly minus 6 per cent. The RBI will be faced with a similar dilemma if inflation remains elevated. Public investment driven growth will have to continue, to crowd in private investment at more normalised rates of interest. A loose monetary policy might have run its course. As the MPC has said: “For a sustained lowering of core inflation, continuing the normalisation of excise duties and VATs alongside measures to address other input cost pressures assume critical importance, more so as demand improves.”