Surging input prices, rural disruptions caused by high Covid cases twin risks to inflation: Crisil – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/indicators/inflation-back-to-haunt-on-higher-input-prices-rural-economy-disruptions-crisil/articleshow/82971913.cmsSynopsis

It said the rising spread of Covid-19 infections in the hinterland could lead to disruptions in food production and its transportation to the wholesale markets, and further localised lockdowns could slow down mandi arrival rates even more and lead to upward pressure in the coming months.

Ratings agency Crisil on Wednesday said that surging input prices and rural economy disruptions brought on by the intensification of the second Covid-19 wave are the two upside risks to inflation that have have begun to kick in.

It said the rising spread of Covid-19 infections in the hinterland could lead to disruptions in food production and its transportation to the wholesale markets, and further localised lockdowns could slow down mandi arrival rates even more and lead to upward pressure in the coming months.

“We have two reasons to believe that upside risks to CRISIL’s consumer price index (CPI)-linked inflation projection of 5% for this fiscal have begun to kick in: surging input prices and rural economy disruptions,” the ratings agency said, added that it earlier expected CPI inflation to moderate to 5% in FY22 from 6.2% last fiscal.

India’s wholesale price index (WPI) inflation crossed double-digit level at 10.5% on-year in April from 7.4% in March, for the first time since 2010. On the other hand, retail inflation, moderated to 4.3% from 5.5% in March, led by a high base of the previous year. CPI had spiked to 7.2% in April 2020.

“But last year’s base may not reflect accurate trends, as data collection was disrupted in April and May 2020. Hence, we have focussed on sequential price trends on a seasonally adjusted basis,” Crisil said.

As per the report, surging international commodity prices, by raising manufacturing costs, are intensifying inflationary pressures. Crude oil, metals, edible oils and rising transportation costs are impacting domestic inflation. Rising fuel inflation is putting pressure on domestic CPI inflation, it said.

Within food inflation, falling vegetable prices are capping the overall increase, while edible oils and protein items are rising sequentially.

The sequential rise in core CPI inflation has been moderate so far. Petrol and diesel prices have been the key inflation drivers of the rise, via raising inflation in the transport and communication sector, according to Crisil.

However, the sequential rise in rural core inflation was higher than that in urban in April 2021, a phenomenon not seen in the previous 16 months.

While the agency expects consumer durables, steel products and automobiles to pass on the rising input costs to consumers, it said the cost pressures for organised retail (that includes from FMCG) have been relatively stable so far until April.

“Overall, producers are currently bearing a higher burden of rising input costs than consumers. However, as demand revives, these costs can get increasingly passed on to consumers,” Crisil said.

On the risk of upside pressure on food prices, it said any shock to food prices can cause headline inflation to go off the mark, as food is the most volatile and largest weighted category in the CPI inflation group, and pass-through of high global food prices and rural disruptions are the two risks that emanate on this front.
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