To make matters worse, unless the government reduces excise charges further, a big increase in fuel prices is expected in March as state elections end.
Retail inflation is expected to average 5.8% year-on-year in 2022-2023, according to Nomura, which is higher than the RBI’s prediction of 4.5 percent. “Upside risks to inflation include higher commodity costs, a rise in fuel pump prices following state elections, pressures to reopen services, and raised household inflation expectations,” it stated.
What causes inflation to rise?
Inflation isn’t going away anytime soon. In fact, prices are rising faster than they have been since the early 1980s.
According to the most current Consumer Price Index (CPI) report, prices increased 7.9% in February compared to the previous year. Since January 1982, this is the largest annualized increase in CPI inflation.
Even when volatile food and energy costs were excluded (so-called core CPI), the picture remained bleak. In February, the core CPI increased by 0.5 percent, bringing the 12-month increase to 6.4 percent, the most since August 1982.
One of the Federal Reserve’s primary responsibilities is to keep inflation under control. The CPI inflation report from February serves as yet another reminder that the Fed has more than enough grounds to begin raising interest rates and tightening monetary policy.
“I believe the Fed will raise rates three to four times this year,” said Larry Adam, Raymond James’ chief investment officer. “By the end of the year, inflation might be on a definite downward path, negating the necessity for the five-to-seven hikes that have been discussed.”
Following the reopening of the economy in 2021, supply chain problems and pent-up consumer demand for goods have drove up inflation. If these problems are resolved, the Fed may not have as much work to do in terms of inflation as some worry.
What factors contributed to India’s inflation in 2021?
Retail inflation reached a three-month high of 4.9 percent in November 2021, according to the Consumer Price Index (CPI).
For the seventh month in a row, it is comfortably within the Reserve Bank of India’s target of 2-6 percent. Despite state and federal governments lowering gasoline and diesel taxes, this increase occurred. The fact that core inflation reached 6.2 percent in November 2021 was a big source of concern. In November, wholesale price inflation hit a new twelve-year high of 14.23%, owing primarily to a surge in primary food inflation as well as increases in fuel and power, as well as oil and gas costs.
The November CPI inflation rate of 4.91 percent was lower than most forecasts, but core inflation of more than 6% is cause for alarm. For the past three months, retail inflation has risen slightly but remained below 5%. Food and vegetables for the non-seasonal rains have accounted for the majority of the increase in prices. The drop in food and crude costs is expected to lead to decreased inflation in the coming months. Unless there is a dramatic jump in CPI, inflation will be on an increasing slope, but mostly below the central bank’s range, which will help sustain the current low-interest-rate environment for at least 1-2 quarters, said Nish Bhatt, Founder and CEO, Millwood Kane International.
While the CPI inflation rate of 4.91 percent is within the central bank’s goal range, experts feel it is still on the higher half of the band and has been trending higher for the second month in a row.
Fuel and transportation expenses remained the key factors driving the level up in this reading. These groups put downward cost pressure on a variety of inputs. The extent to which higher prices are passed on to customers, on the other hand, will be determined by the strength of demand in certain product categories. Although not a major issue right now, rising prices will irritate customers as demand improves. Given the high inflationary expectations, the RBI will keep a close eye on inflation, and we hope that low interest rates continue, as capital-intensive industries such as real estate are heavily influenced by credit costs at both the consumer and developer levels, said Vivek Rathi, Director Research, Knight Frank India.
A few experts anticipate core inflation will remain high for the foreseeable future, but that it will level off in the coming months. Overall, while headline inflation (a measure of total inflation in an economy) was lower than projected, it made no material difference. By January 2022, we estimate it to reach 6%. Core inflation, on the other hand, is expected to remain at 6%. As a result, explicit normalization of monetary policy is expected to commence in February 22 with a 15 basis point increase in the reverse repo rate, said Nikhil Gupta, Chief Economist of Motilal Oswal Financial Services Ltd.
The increase in manufacturing and food costs was primarily responsible for the increase in WPI statistics, which reached a new high of 14.23% in November. The difference between retail and wholesale price-based inflation has expanded in recent months, despite analysts’ predictions that it will range between 11 and 12 percent in the coming months. Surprisingly, WPI inflation has persisted in double digits for several months in a row, while headline retail inflation is hanging at 5%, well within the central bank’s goal range of 2 to 6%.
Despite a drop in global crude oil prices and a reduction in fuel prices, there are fears that corporations are attempting to pass on higher costs to consumers due to increased domestic demand. The WPI results were higher than Motilal Oswal’s projection of 11.8 percent YoY and the Bloomberg survey of 11.98 percent YoY, according to a report. According to the data, WPI inflation in April-November 21 was 12.2% YoY, compared to a deflation of 0.2 percent YoY in April-November 2020. WPI inflation in primary articles hit an almost two-year high of 10.3 percent year over year, up from 5.2 percent a month ago. According to the report, food article inflation jumped to 4.9 percent YoY in November 21 after three months of deflation, resulting in overall high WPI food inflation of 6.7 percent YoY in November 21 compared to 3.1 percent YoY in October 21. According to the data, inflation in manufactured food goods fell to 10.3% YoY in November 2021, down from 12.7 percent YoY in October 2021.
The Fuel and power WPI inflation continued to rise, reaching 39.8% YoY in Nov 2021, up from 37.2 percent YoY in Oct 2021, according to the Motilal Oswal study. However, WPI inflation in manufactured products was somewhat lower in Nov ’21, at 11.9 percent YoY, compared to 12 percent YoY in Oct ’21. The report, on the other hand, notes that WPI core inflation (non-food manufactured goods) increased to 12.2% YoY in November.
Motilal Oswal analysts predict a 15-basis-point reverse repo rate hike at the next monetary policy meeting in February 2022.
Is India’s inflation high?
The Indian government’s ministry of statistics provided data on inflation, confirming fears of a rising-price spectre in the midst of an already-fragile economic recovery. Overall retail inflation in India was around 6%, according to the consumer price index (CPI), and has been continuously growing since September 2021. Given the double-digit levels experienced in the past, this may not appear to be excessive, but the rise in food inflation is a cause for concern. Food inflation was less than 1% in September-October 2021, but by January 2022, it had risen to 5.4 percent overall and 5.9 percent in urban areas. Apart from the obvious suspects of fruits and vegetables, edible oils have experienced persistently high price inflation, with an average price increase of 24 percent over the last 18 months. Cereal inflation, which increased to 3.4 percent in January following eight months of negative inflation, a solid record that was disrupted last September, is one of the newcomers to this list of specific concerns.
What is creating 2021 inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.
RELATED: Inflation: Gas prices will get even higher
Inflation is defined as a rise in the price of goods and services in an economy over time. When there is too much money chasing too few products, inflation occurs. After the dot-com bubble burst in the early 2000s, the Federal Reserve kept interest rates low to try to boost the economy. More people borrowed money and spent it on products and services as a result of this. Prices will rise when there is a greater demand for goods and services than what is available, as businesses try to earn a profit. Increases in the cost of manufacturing, such as rising fuel prices or labor, can also produce inflation.
There are various reasons why inflation may occur in 2022. The first reason is that since Russia’s invasion of Ukraine, oil prices have risen dramatically. As a result, petrol and other transportation costs have increased. Furthermore, in order to stimulate the economy, the Fed has kept interest rates low. As a result, more people are borrowing and spending money, contributing to inflation. Finally, wages have been increasing in recent years, putting upward pressure on pricing.
Why is India’s inflation rate so low?
Reuters, BENGALURU, Oct 8 – According to a Reuters poll, India’s retail inflation fell again in September, falling to a five-month low, owing to a favorable comparison with last year and moderated food prices that offset a rise in the cost of crude oil and fuel.
In 2021, what would India’s GDP be?
In its second advance estimates of national accounts released on Monday, the National Statistical Office (NSO) forecasted the country’s growth for 2021-22 at 8.9%, slightly lower than the 9.2% estimated in its first advance estimates released in January.
Furthermore, the National Statistics Office (NSO) reduced its estimates of GDP contraction for the coronavirus pandemic-affected last fiscal year (2020-21) to 6.6 percent. The previous projection was for a 7.3% decrease.
In April-June 2020, the Indian economy contracted 23.8 percent, and in July-September 2020, it contracted 6.6 percent.
“While an adverse base was expected to flatten growth in Q3 FY2022, the NSO’s initial estimates are far below our expectations (6.2 percent for GDP), with a marginal increase in manufacturing and a contraction in construction that is surprising given the heavy rains in the southern states,” said Aditi Nayar, Chief Economist at ICRA.
“GDP at constant (2011-12) prices is estimated at Rs 38.22 trillion in Q3 of 2021-22, up from Rs 36.26 trillion in Q3 of 2020-21, indicating an increase of 5.4 percent,” according to an official release.
According to the announcement, real GDP (GDP) or Gross Domestic Product (GDP) at constant (2011-12) prices is expected to reach Rs 147.72 trillion in 2021-22, up from Rs 135.58 trillion in the first updated estimate announced on January 31, 2022.
GDP growth is expected to be 8.9% in 2021-22, compared to a decline of 6.6 percent in 2020-21.
In terms of value, GDP in October-December 2021-22 was Rs 38,22,159 crore, up from Rs 36,22,220 crore in the same period of 2020-21.
According to NSO data, the manufacturing sector’s Gross Value Added (GVA) growth remained nearly steady at 0.2 percent in the third quarter of 2021-22, compared to 8.4 percent a year ago.
GVA growth in the farm sector was weak in the third quarter, at 2.6 percent, compared to 4.1 percent a year before.
GVA in the construction sector decreased by 2.8%, compared to 6.6% rise a year ago.
The electricity, gas, water supply, and other utility services segment grew by 3.7 percent in the third quarter of current fiscal year, compared to 1.5 percent growth the previous year.
Similarly, trade, hotel, transportation, communication, and broadcasting services expanded by 6.1 percent, compared to a decline of 10.1 percent a year ago.
In Q3 FY22, financial, real estate, and professional services growth was 4.6 percent, compared to 10.3 percent in Q3 FY21.
During the quarter under examination, public administration, defense, and other services expanded by 16.8%, compared to a decrease of 2.9 percent a year earlier.
Meanwhile, China’s economy grew by 4% between October and December of 2021.
“India’s GDP growth for Q3FY22 was a touch lower than our forecast of 5.7 percent, as the manufacturing sector grew slowly and the construction industry experienced unanticipated de-growth.” We have, however, decisively emerged from the pandemic recession, with all sectors of the economy showing signs of recovery.
“Going ahead, unlock trade will help growth in Q4FY22, as most governments have eliminated pandemic-related limitations, but weak rural demand and geopolitical shock from the Russia-Ukraine conflict may impair global growth and supply chains.” The impending pass-through of higher oil and gas costs could affect domestic demand mood, according to Elara Capital economist Garima Kapoor.
“Strong growth in the services sector and a pick-up in private final consumption expenditure drove India’s real GDP growth to 5.4 percent in Q3.” While agriculture’s growth slowed in Q3, the construction sector’s growth became negative.
“On the plus side, actual expenditure levels in both the private and public sectors are greater than they were before the pandemic.
“Given the encouraging trends in government revenues and spending until January 2022, as well as the upward revision in the nominal GDP growth rate for FY22, the fiscal deficit to GDP ratio for FY22 may come out better than what the (federal) budget projected,” said Rupa Rege Nitsure, group chief economist, L&T Financial Holdings.
“The growth number is pretty disappointing,” Sujan Hajra, chief economist of Mumbai-based Anand Rathi Securities, said, citing weaker rural consumer demand and investments as reasons.
After crude prices soared beyond $100 a barrel, India, which imports virtually all of its oil, might face a wider trade imbalance, a weaker rupee, and greater inflation, with a knock to GDP considered as the main concern.
“We believe the fiscal and monetary policy accommodation will remain, given the geopolitical volatility and crude oil prices,” Hajra added.
According to Nomura, a 10% increase in oil prices would shave 0.2 percentage points off India’s GDP growth while adding 0.3 to 0.4 percentage points to retail inflation.
Widening sanctions against Russia are likely to have a ripple impact on India, according to Sakshi Gupta, senior economist at HDFC Bank.
“We see a 20-30 basis point downside risk to our base predictions,” she said. For the time being, HDFC expects the GDP to rise 8.2% in the coming fiscal year.
In India, how is inflation managed?
The Reserve Bank of India is in charge of controlling inflation through monetary policies, which include raising bank rates, repo rates, cash reserve ratios, dollar purchases, and managing money supply and credit availability.
What is the current rate of inflation in India?
The Reserve Bank of India, on the other hand, predicted that India’s average inflation would ease to 4.5 percent in 2022-23, down from 5.3 percent last week. “There is no need to fear about inflation,” RBI Governor Shaktikanta Das remarked. The inflation rate is predicted to be approximately 6%.
What are the three different types of inflation?
- Inflation is defined as the rate at which a currency’s value falls and, as a result, the overall level of prices for goods and services rises.
- Demand-Pull inflation, Cost-Push inflation, and Built-In inflation are three forms of inflation that are occasionally used to classify it.
- The Consumer Price Index (CPI) and the Wholesale Price Index (WPI) are the two most widely used inflation indices (WPI).
- Depending on one’s perspective and rate of change, inflation can be perceived favourably or negatively.
- Those possessing tangible assets, such as real estate or stockpiled goods, may benefit from inflation because it increases the value of their holdings.