Inflation steps down

by Mahesh Vyas

Inflation in consumer prices declined to 7.04 per cent in May 2022 from 7.79 per cent in April. It was 6.95 per cent in March. Earlier, the inflation rate was closer to 6 per cent. It therefore appears that inflation may have peaked in May. Several measures taken by the government seem to be working at reining in inflation. While it may be too early to claim that the increase in policy interest rates by the RBI are working to control inflation, fiscal measures such as reducing the indirect taxes on fuel could have directly helped bring down inflation in May 2022.

On May 22, 2022, the central government announced a cut in excise duty on petrol by Rs.8 per litre and on diesel by Rs.6 per litre. It also announced reductions in customs duty on import of raw materials for plastic and steel. The average price of petrol in April 2022 was Rs.112.6 per litre and that of diesel was Rs.100.2 per litre. Ceteris paribas, the cut in excise duty should lead to a 6-7 per cent fall in prices of these fuels.

Given that the excise duty cut was effective towards the end of May, the impact in the month was partial. The price of petrol fell by 2.4 per cent in May, and that of diesel dropped by 2 per cent. Ceteris paribas, again, prices of these fuels in June would be lower than they were in May. April had seen one of the highest increases in fuel prices. They had spiked by 3 per cent in a single month. The monthly inflation in the fuel index is rarely more than 2 per cent and not too often over 1 per cent. The 3 per cent increase in April was therefore a big spike. This, perhaps, explains the government intervening to control fuel prices. And, the intervention achieved its immediate objective.

The consumer price index for fuel and light in May 2022 was 9.5 per cent higher than it was a year ago. This is much lower than the 10.7 per cent increase by the same measure seen in April.

The fuel and light index has a weight of 6.84 per cent in the overall consumer price index. This is not very different from the 6.53 per cent weight of clothing and footwear. Inflation in the two groups is also comparable 9.5 per cent and 8.9 per cent. But, inflation in the fuel index attracts a lot more attention because it is largely controlled by the government.

The government also influences inflation in food prices. In light of the increasing international and domestic prices of wheat, the government banned wheat exports on May 14, 2022 about a week before it cut taxes on petrol and diesel. This intervention was less effective as it was less direct. A ban of exports only increases domestic supplies which hopefully would cool domestic price. Prices fell 4 per cent immediately on May 14. But, by May-end they recovered to their pre-ban level and have been slightly above the pre-ban level. The consumer price index for non-PDS wheat was 1.37 per cent higher than it was in April. At this level of monthly growth, wheat prices still have substantial momentum. The monthly growth in wheat prices is rarely over one per cent. The decline in wheat price inflation was nominal from 9.6 per cent in April to 9.5 per cent in May.

But, the problem in food inflation is not of wheat or even cereals. Food inflation in May was 7.97 per cent. Wheat has a weight of only 2.56 per cent. Cereals as a whole has a weight of 9.67 per cent but inflation in cereals was only 5.33 per cent. The problem is in vegetables which has a weight of 6.04 per cent and an inflation of 18.26 per cent. The government cannot do much on this. Its efforts cannot do much to control the 13.26 per cent inflation in oils and fats as well which has a modest weight of 3.56 per cent. The government has reduced customs duties and also conditionally waived duty. Inflation in vanaspati, refined oil and mustard oil is particularly high.

Food inflation in May 2022 was quite high at 7.97 per cent although this was a shade lower than the 8.31 per cent pencilled in April.

Fuel and light which saw inflation at 9.54 per cent and food at 7.97 per cent are the principal components of non-core inflation. The overall non-core inflation in May was 8.2 per cent. Government interventions helped reduce it from the 8.66 per cent level it was perched at in April. Interestingly, this fall of 0.46 percentage points is smaller than the 0.77 percentage points fall in core inflation which fell from 6.95 per cent in April 2022 to 6.18 per cent in May.

The highest source of core inflation is transport and communication. This segment carries a substantial weight of 8.59 per cent and reported an inflation of 9.54 per cent in May, which co-incidentally is the same inflation rate as recorded by fuels and light.

Inflation in June may continue to benefit from the efforts made by government (mostly in May) to effect lower prices. It may also benefit a wee-bit from the somewhat elevated base in June 2021. Nevertheless, inflation is expected to continue to remain close to 7 per cent in June 2022.