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EconomyWhy prices are falling after incessant reports of inflation

Why prices are falling after incessant reports of inflation

Easing international commodity prices and new Kharif arrival are set to dampen inflationary pressures in the coming months, the Ministry of Finance has noted

The inflation marker that really matters to the middle-income group, the Consumer Index (CPI), which shows how much things cost to the end user, has begun easing. A reducing CPI could see prices fall in the coming months, the Ministry of estimates. But how has the trend of inflation reversed after the Reserve Bank of India’s (RBI) Monetary Policy Committee kept warning of inflationary pressures?

Kharif crops have arrived, international commodity prices are lower and a passthrough of lower input costs to consumers is causing it, the ministry said in its Monthly Economic Review (MER) for October, which was released today. The MER warned, though, that the global macroeconomic situation was uncertain and a recession in many advanced economies would impact India’s exports.

“Easing international commodity prices and new Kharif arrival are set to dampen inflationary pressures in the coming months. Going forward, the current retail inflationary pressures are expected to ease with pass-through of lower input costs to consumers, also affirmed by the Reserve Bank of India’s inflation projections for the next two quarters,” the MER stated.

The ministry pointed out that the wedge between CPI and wholesale inflation, influenced more by global prices, had declined from a height of -10% in November 2021 to -1.6% in 2022.

How prices began declining

India’s headline retail inflation softened to a three-month low of 6.77% in from 7.41% in September as prices declined substantially. This might make the MPC of the RBI less hawkish when it meets next month, even though it is unlikely that there would be a pause in the ongoing rate hike cycle.

The MER stated that the recovery in economic activity across sectors had improved the employment situation in the country. It said the periodic force survey (PLFS) showed that the urban unemployment rate had declined for four consecutive quarters till June — the latest PLFS data released on Thursday showed a further dip in the urban unemployment rate.

The MER said that net payroll additions in the Employees’ Provident Fund Organisation had grown in double digits in September, reflecting the increased pace of formalisation of the economy, while most private sector indicators showed that key industries had seen an increase in hiring activity in and in the September quarter, but larger macroeconomic risks remained.

Read: When MPC of RBI missed its target

“The global economy continues to navigate an increasingly turbulent and uncertain environment. Despite the current slowdown in global growth, inflation has risen to a multi-decade high in many economies, amid elevated and energy prices.”

The MER said that indicators of global economic activity had deteriorated alongside tighter financial conditions and a steep fall in consumer confidence. The global composite PMI output index shrank for the second consecutive month in September, led by weakness in advanced economies as increasing uncertainty and high energy prices dented confidence.

“A rapid deterioration in global growth prospects, high inflation, and worsening financial conditions have increased fears of an impending global recession. The spillover of the global slowdown may dampen India’s exports businesses’ outlook,” the MER stated.

The report stated that India’s supplies had also been impacted by the conflict in Europe and the vagaries of nature. The domestic prices of some food items had risen amid a rise in international prices and grain availability was impacted by heat waves and deficient southwest monsoon in the current year. However, export restrictions had ensured that the country’s needs were fully met.

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