Number Theory: Global and local inflation concerns remain elevated

India’s retail inflation stood at 7% in May, lower than the eight-year high of 7.8% in April. The high rate at which prices are rising both domestically and globally is a matter of economic concern. Here are four charts that explain this in detail.Inflation is still high compared to historical levelsWhile both core (non-food, non- fuel) and non-core inflation have declined significantly in May compared to April, the present numbers are still high compared to historical values. The moderation in Consumer Price Index in May is on expected lines, and largely a result of favourable base effect. “We should not claim victory over inflation when the first annual number comes down. Some inflation prints will be influenced by base effects. Instead, we should keep looking at the sequential momentum with as much vigour. The May inflation reading will be a case in point,” HSBC chief India economist Pranjul Bhandari warned in a note on June 7.

The moderation in Consumer Price Index in May is on expected lines, and largely a result of favourable base effect.

Inflation has emerged as a major drag for business confidenceThe biggest threat of inflation is its ability to derail India’s economic recovery and push it towards stagflation (low growth, high inflation). For example, the purchasing managers’ indices (PMIs) for both manufacturing and services have been reporting a weakening of business confidence due to inflation fears.These concerns can also be seen in the results of the Business Inflation Expectations Survey conducted by Indian Institute of Management Ahmedabad, where the probability of retail inflation staying above 6%, the upper tolerance limit of the Reserve Bank of India, over the next 12 months breached 50% in February and April. Heightened concerns around inflation have led to a situation where firms are bearish about making profits even though sales are improving. “Improved sales expectations are offset by high cost increases. As a result, profit expectations remain muted,” the latest April report said.

The biggest threat of inflation is its ability to derail India’s economic recovery and push it towards stagflation (low growth, high inflation).

Advanced country inflation will continue to weigh on capital markets and external accountsConsumer prices in the US grew at 8.6% in May, the highest monthly value since 1981. The latest inflation reading has strengthened the belief that the US Federal Reserve will be forced to adopt a more hawkish policy stance on interest rates. “Money markets are pricing 175 basis points by its September decision, implying two half-point and one 75 basis points hike. That’s upgraded from only fully pricing half-point hikes previously,” Bloomberg reported on June 13. One basis point is a hundredth of a percentage point.Expectations of higher-than-expected rate hikes led to a sharp fall in US equity markets on June 10, with the Dow Jones Industrial Average falling 880 points, or 2.5%. Capital markets in India also fell on international cues with the benchmark Sensex falling 2.68% on June 13.Monday’s fall is in keeping with foreign investor driven headwinds to capital markets in the past few months. While domestic investors, especially mutual funds, have been countering the external headwinds to capital markets, inflation driven rate hikes will continue to put pressure on both capital markets and the rupee, which fell to yet another all-time low of 78.04 against the dollar.

Consumer prices in the US grew at 8.6% in May, the highest monthly value since 1981.

Global food prices will continue to put pressure on policy to contain farm incomesWhile the food price index of the Food and Agricultural Organisation (FAO) moderated slightly from 154.9 in April to 154 in May, its cereal subcomponent increased from 166 in April to 169.7. With wheat output expected to be significantly lower than expected due to abnormal heatwave conditions in March, India is banking on plentiful rainfall since the India Meteorological Department has projected a normal monsoon.The lower than normal procurement for wheat, expected to be 9.6million tons compared to 13.2 million tons last year as per a Mint report on May 24, will put pressure on the government to procure a greater quantity of rice. Any slippage in the monsoon, or farmers taking to private selling in larger than expected quantities, might force the government to impose trade restrictions on rice as well, which could squeeze farm earnings and rural incomes.

The food price index of the Food and Agricultural Organisation (FAO) moderated slightly from 154.9 in April to 154 in May.

ABOUT THE AUTHOR

Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.
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