INFLATION DYNAMICS

 Inflation refers to a situation where the value of money falls and prices of goods and services increases, primarily due to either a push in costs of production or pull in the demand for output or a combination of both.After the outbreak of Covid19 research interest in inflation dynamics and inflationary expectations gathered momentum.Studies are anchored to the inflation target given its importance to security and price stability especially in the medium term.Inflation expectations broadly indicate what different economic agents namely consumers, businesses and investors assess today about inflation in the future.As the evolution of the inflation trajectory is conditioned by inflation expectations central bank focus on anchoring inflation expectations and if it is anchored expects that short term supply disruptions or shocks would not alter the  expectations about inflation in the medium term.Normally the measurement of inflation conducted at the retail level is known as Consumer price index (CPI) and at the wholesale price level Wholesale price index (WPI).WPI tracks price changes at the producers level as against CPI at the consumer level.WPI gives more weightage to manufactured goods. CPI gives more weightage to food items and also specifically capture changes in the prices services.CPI analyses retail inflation of goods and services across 260 items whereas WPI analyses whole sale inflation of 697 items. WPI remained low during Covid19 period but gradually increased as post pandemic economic activities gathered momentum reaching around 13% in 2021-22.Russia Ukraine conflict and global supply chain disruptions further increased However currently the difference  between CPI and WPI has narrowed down in India.

According to IMF global growth estimate is projected to fall from 3.4 % in 2022 to 2.9 in 2023 and increase to 3.1 in 2024, whereas global inflation is expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, still above the pre pandemic level of 3.5% during 2017-19.Inflation in advanced economies is projected to decline from 7.3% in 2022 to 4.6% in 2023  and 2.6% in 2024,whereas in emerging markets and developing economies projected annual inflation is 9.9% in 2022,8.1% in 2023 and 5.5% in 2025.Multiple external shocks comprising of pandemic, supply chain disruptions, food and energy crisis, According to RBI Governor Ukraine war and financial market volatility arising from aggressive monetary policy tightening have impacted price pressures in the South Asian economies like in other parts of the world.During the first three quarters of 2022 food price inflation in South Asia averaged more than 20% .The region's heavy dependence on imported fossil fuels has made it vulnerable to imported fuel inflation.RBI's Monetary policy Committee has already fixed the retail median inflation  (CPI) target of 4% with a band of + or - 2%(2-6%) for the country. Retail inflation for January 2023 surged three months high of 6.5 from 5.72% in December largely due to prices of cereals and other food products, spices,footwear and personal care items as against the fall in vegetable prices. Cereals and products with 9.7 weightage accounted for 3.5% in January 22 which increased to 4.19 % in December 22 and 5.94 in January 2023.Stoppage  of extra free grain distribution under PM-GKAY in December and the surge in wheat and rice prices (up 25% and 10.4%respectively) pushed the composite index up.and Similarly clothing and footwear with 6.5 weight increased from from 8.8 to 9.2% during the same period .RBI has laid out its inflation expectations for the year ahead with its projection of 5.7% for the current Quarter. Since January 2023 inflation rate comes from a high base of 6.01 % in January 2022 the projection for quarter one is likely to change by some margin.  Further states like Telengana(8.55), Andhra Pradesh (8.25), Madhya Pradesh(8.13),  Uttar Pradesh(7.4) and Haryana(7.05) reported higher inflation than the national average. On the other hand rural inflation is high at 6.85% in December and 6.12% in January 2023.as against Urban inflation of 6.% and 5.9% in December and January. Commentators attributed hike in rural inflation primarily to spike in prices of cereals and stickiness to core inflation (non Food and non fuel items).Prices of meat, egg,milk and milk products and snacks, transportation costs and wheat prices are playing a decisive role in inflation. Within cereals non public distribution wheat/atta prices increased 25.1% in January 2023 after having risen 22.2% in December. 

On the contrary India's wholesale price inflation index (WPI) continously declined for the last eight months in a row reaching a two year low of 4.73% in January 2023, much lower than 6.5% of  retail inflation in January. WPI inflation was at 4.95% in December 2022and was at a peak of 16.63 % in May 2022 and at 13.68% in January 2022. Many analysts expect further ease of WPI to less than 4% in February due to favourable base effect and expected fall of commodity prices in global market. Some even further expects likely reduction of WPI to 3% or far lower than the estimated 9.3 %.This may not bring much consolation to policy makers because ultimately the reduction in retail inflation matters most . According to RBI this pattern suggest that secondary price effects have been playing with expectations threatening up cycles. More over present surge in inflation is mainly on account of supply constraints.Government has managed to improve the supply of edible oil and their prices have softened. Fuel prices are relatively stable now. Most significant factor as of now is cereals prices. Government decision to sell wheat at ₹2350 per quintal to bulk users through e-auction can have some impact on open market wheat price.

Measures to control inflation mainly depend on monetary policy, fiscal policy and trade policy instruments.Fiscal measures involve controlling expenditure, checking both revenue and fiscal deficits.Monetary policy measures comprise of mopping up excess liquidity through changes in  policy repo rate,reserve ratio,selective credit priorities and open market operations.whereas trade policy focus on restricting trade deficit.Monetary policy Committee (MPC) in its latest meeting decided by a majority of 4 members out of 6  to increase the policy repo rate by 25 basis points to 6.50% consequently Standing Deposit Facility (SDF) revised to 6.25% and Marginal Standing Facility (MSF) rate to 6.75%. Still RBI is not comfortable with prevailing retail inflation.However MPC expects  the inflation rate to moderate in 2023-24 to 5.3% .As per budget document revenue deficit which was 4.4% in 2021-22 reduced to 4.1% in 2022-23 (RE) and is budgeted to be 2.9% of GDP in 2023-24.Fiscal deficit which was 6.7% in 2021-22 reduced to 6.4% in 2022-23(RE) and expected to decline to to 5.9 % (BE) in 2023-24.Similarly Primary deficit as a percentage of GDP during the same period is 3.3% ,3.0% and 2.3% respectively. India's merchandise trade witnessed 6.6% fall on year to year basis to $32.91 in January 2023 with 14 of India's top 30 export items reported decline. On the contrary due to sharp fall in imports to 12 month low,  trade deficit has shrunked to $17.75 billion in January 2023.But there is no guarantee that this trend in trade deficit will sustain.The fact remains that monetary policy is more effective in taming inflation. According to RBI inflation could be stubborn and monetary policy stance needs to remain disinflationary indicating continuance of current policy.On the other hand fiscal consolidation can provide productive resources for private sector. Controlling food inflation and reducing pump prices of petroleum products preferably through bringing  under GST framework instead of existing indirect taxes and cess by Centre and states can significantly reduce inflation. In short continuance of monetary policy committee's prescription, fiscal measures like increased capital expenditure, taxation and fiscal consolidation measures and trade policy suitable to evolving external sector developments are effectively implemented, obviously inflation target can be achieved and as a result GDP growth could reach even 7percent or above.