Clipped from: https://www.thehindubusinessline.com/opinion/editorial/inflation-bugbear/article69120652.ece
Imported inflation complicates policy response
Diehard optimists would say that retail inflation is trending gently downwards — but the fact is that it has been ruling at above 5 per cent since September 2024. But what is particularly worrisome are the global headwinds emanating out of recent developments in the US.
A slew of fresh US sanctions on Russia has roiled the oil market, as a result of which Brent crude oil futures till March and May this year are ruling at $80 a barrel and $75 a barrel, respectively, even as current prices are ruling at around the $80 level. This sharp spike of 6.1 per cent till January 14 creates serious concerns with respect to imported inflation at a time when food inflation has already assumed endemic proportions. Alongside oil, the Bloomberg Commodity Index too shows a sharp spike between December 5 last year and January 14 (RBI January Bulletin). While this will raise the cost of imports anyway, it will in the process also put downward pressure on the rupee which is already hit by capital outflows, owing to a host of financial uncertainties arising out of the second Trump presidency. For the Reserve Bank of India, these factors could complicate its endeavour to push growth, while keeping a watch on the inflation needle, as it were. What is reasonably certain is that a rate cut is virtually off the table next month.
The RBI is already having to deal with rising inflation expectations arising out of persistent food price driven inflation. Persistent inflation raises inflationary expectations and forces households to scrimp on spending amidst pressure on incomes. This hurts growth. Meanwhile, inflationary expectations can also be a self-fulfilling prophecy. At present, these expectations are being led by food prices, which in turn are rising on account of supply bottlenecks. The onus of fixing these bottlenecks rests more with the government, and less with the RBI.
Inflation should be viewed as a structural problem, demanding medium term policy fixes that address constraints in productivity as well as supply chain issues in food products. Harsh fiscal consolidation or a short-term suppression of inflation expectations through high interest rates could complicate the growth-inflation mix. RBI and the government will have to stay the course at a time of global uncertainty in the wake of the second Trump presidency — while being mindful of growth concerns. The correlation between food and non-food, non-fuel inflation has been a subject of considerable debate recently. A range of extraneous factors such as exchange rate, tariffs and commodity prices too lead to elevated core inflation. Yet, it would be a stretch to argue, as some policymakers have sought to do in the past, that the two are not particularly related to each other. More conceptual clarity is needed, going forward. For now, circumspection is the watchword.
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