Retail inflation hits 3-month high of 6.52%; here's what economists say

Consumer Price Index (CPI) touched a three-month high on Monday. After remaining below the tolerance band of 6 per cent for two months and reaching a one-year low in December’22, the inflation rate spiked again in January. According to several economists, the rise in food inflation, crude oil price rise coupled with several other economic issues contributed to the spike in the inflation rate.  

1. Spike in food inflation

Economists pointed out that the major driving factor behind the spike in inflation is the food inflation. CPI food index rose to 5.9 per cent in Jan’23 from 4.2 per cent in Dec’22, on YoY basis. Cereals and product-led food inflation reached 16.1 per cent in January 2023 from 13.8 per cent in December 2022.

“Government’s decision of 3 Million tonnes open market sale of wheat was targeted towards cooling off wheat prices. However, despite open market sale the market prices haven’t cooled off. The decision to sell wheat at Rs 2,350/quintal to bulk users through e-auction can have some impact on open market wheat price,” said Dr. Sunil Kumar Sinha, Principal Economist, India Ratings.  

2. Rise in input cost

When the inflation due to cereal is on an upward trend, the price of the fodder goes up leading to a rise in the input costs. For the past few months, cereal inflation has been on an upward trend, thus it has finally picked up, added economists from HDFC Bank.

3. Rise in oil prices

Oil prices rose more than 2 per cent on February 10 and posted weekly gains of over 8 per cent, as Russia announced plans to reduce oil production next month after the West imposed price caps on the country's crude and fuel. Economists pointed out that the dependency of India on oil imports has been a major hurdle for the country in controlling inflation. “Costly food items and rise in oil prices pushed the inflation upwards. India’s dependence on oil imports continues to affect India’s inflation,” added Raghvendra Nath, economist and MD, Ladderup, a Wealth Management company. 

4.  Core inflation rise continues due to high gold price

Amongst the 8 major broad groups of core inflation, 4 of the items have remained above 6 per cent. “Core also poses a considerable risk from higher gold prices and rising housing inflation. Going forward stickiness in core would persist from higher discretionary spending and pass-through of input costs to output prices which is yet to materialize,” added Dipanwita Majumdar, economist, Bank of Baroda.  

5.  Exercise of pricing power

The rise in core inflation is primarily driven by uneven consumer demand, asserted economists. They also highlighted the fact that the pricing power exercised by the manufacturing sector has been a major reason for stickiness in the core inflation. The pricing power exercised by the manufacturing sector will only be nullified or minimized, if there is softening of global commodity prices and normalisation of the supply chain, added economists.