MUMBAI: Inflationary pressures are broadening across the consumption basket, with the weighted share of goods priced above the central bank’s 4 per cent target surging from 23 per cent in April to nearly 37 per cent in August, the Reserve Bank of India (RBI) said in its October Monetary Policy Report.
This suggests that the recent rise in headline inflation is not confined to a few components of the consumer price index (CPI) basket. The RBI said the inflation distribution across the basket pointed to a progressive broadening of price pressures.
The central bank’s diffusion index divides CPI items into four categories: Inflation below 2 per cent, between 2 and 4 per cent, between 4 and 6 per cent, and above 6 per cent. An increase in the share of items in the higher-inflation categories, along with a rise in headline inflation, indicates that price pressures are becoming more broad-based and generalised, the report said.
The broadening comes alongside a pickup in headline and underlying inflation. CPI inflation rose to 4.8 per cent in August from 4.5 per cent in July, while inflation excluding food and fuel increased to 4.2 per cent from 3.9 per cent. Core inflation excluding precious metals rose to 2.9 per cent from 2.7 per cent in July. The report noted that services inflation also increased in August, indicating a wider spread of price pressures.
Food was an important reason for the price increase. Food and beverages inflation rose to 5.9 per cent in August, with animal protein and spices among the major contributors to the increase since April. The RBI said nearly 48 per cent of the 200-basis-point increase in food inflation between April and August was accounted for by animal protein and spices.
The report also flagged risks from a deficient southwest monsoon and El Niño conditions. At the same time, global energy prices have added to domestic inflation pressures. CPI fuel inflation rose to 5.2 per cent in August from 0.4 per cent in April, partly reflecting the pass-through of higher global crude prices.
The broadening of inflation has become a key consideration for monetary policy. The Monetary Policy Committee (MPC) on Wednesday raised the policy repo rate by 25 basis points to 5.5 per cent and shifted its stance to calibrated tightening, citing a less benign inflation outlook. The RBI raised its FY27 inflation forecast to 5.2 per cent from 5 per cent earlier.
The RBI has indicated that monetary policy is aimed not only at the immediate supply shock but also at preventing its second-round effects from becoming entrenched in inflation expectations and companies’ pricing behaviour. RBI Governor Sanjay Malhotra said the extent and duration of the rate-hike cycle would depend on the extent to which price pressures broaden and second-round effects emerge.
The latest diffusion data therefore provides another measure of the inflation challenge before the central bank, which has to assess whether the recent rise in prices remains concentrated in food and energy or starts feeding into a wider set of goods and services.
Source: Business Standard
