Oil prices are on the rise and vegetable prices are shooting through the roof. Are we seeing the beginning of high inflation days?
It is a valid doubt given the uncertainties in the global oil market post the drone attack on oil fields of the world's biggest petroleum producer Saudi Arabia. Back home, food inflation has been growing and retail inflation in August hit a 10-month high due to increase in prices of household goods, fuel and food. Going by the trend, September may not be different.
However, experts Business Today interacted with feel that while inflationary trends may continue, it is unlikely to go beyond the Reserve Bank of India's target rate of 4 per cent. In August, the consumer price index-based retail inflation stood at 3.21 per cent, higher than 3.15 per cent in July 2019. N R Bhanumurthy, Professor, National Institute of Public Finance and Policy (NIPFP) says that it is too early to predict the trajectory of oil prices. "We will have to wait and see how it pans out internationally. If Saudi can restore the oil supplies quickly, we may not see a huge impact except that transitory phase. But, if it is prolonged, it can have an impact on oil as well as on other commodities. That will have a cascading impact on other commodity prices as well. It is not yet very clear how it is going to happen, but assuming that there will be normalcy at the earliest, we should see a very temporary impact on inflation," he points out.
Devendra Kumar Pant, Chief Economist and Senior Director, Public Finance India Ratings & Research (Fitch Group) also says that since the retail oil prices are revised every day and a lot of it is because of the changes in the price of crude oil and exchange rate, it will impact other sectors as well because petrochemical chain gets affected. "Oil sustaining around $65 per barrel will certainly start getting reflected in inflation. The slower global growth is pulling down the prices, but there are geopolitical developments that are pushing oil prices up. If crude comes to around $60/barrel, it is not a problem, but if it remains elevated for a month or two, then there is a problem. Inflation is low due to slow demand, so inflation is unlikely to breach the 4 per cent mark. Policy (rate) changes are generally meant to respond to the structural changes not cyclical changes," he explains.
Incidentally, the increase in food prices seems to be of a lesser worry.
Bhanumurthy says that the price rise could be because of supply side disruptions caused by floods in some parts of the country. He says that food prices are still on the lower side. "The food prices have been subdued for quite some time. The spike is going to be temporary. For us, the problem right now is slow inflationary situation," he adds.
Pant also considers vegetable price increase to be a seasonal thing that generally occurs during monsoon season due to destruction to crops and starts fading away once the new crop comes in the market. "It happens almost every year. It does not disturb your household budget to a large extent. But, if oil hovers around $70/barrel and beyond, chances are that it is going to impact inflation," he says.