Retail, wholesale inflation moderating, core inflation still a challenge: Economic Survey

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Stating that both wholesale and retail inflation are on the descending slope of the surge that hit the Indian economy in the first half of the current fiscal, the Economic Survey on Tuesday pointed out the inflation challenge in FY24 should be a "lot less stiff" than it has been this year.

The Survey said the upside risks to India's projected inflation rates may outweigh the downside risks with any possible re-emergence of Covid-19 in China that can trigger supply chain disruptions, along with the geopolitics associated with oil, which can affect imported inflation.

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Inflation risks

Any re-emergence of Covid-19 situation in China or a reversal of slump in commodity prices poses risks to the inflation trajectory going ahead, the Survey said.

"Due to the anticipated slowdown in advanced economies, inflation risks coming from global commodity prices are likely to be lower in FY24 than in FY23. However, in terms of overall risks to the benign baseline view on inflation, upside risks to India's projected rates may outweigh the downside risks.

“For instance, the re-emergence of Covid-19 in China can trigger supply chain disruptions as was the case during the pandemic period. On the other hand, if China returns to normalcy from Covid-19, there can be a surge in commodity demand — thus reversing the recent slump in commodity prices," it said.

The Survey pointed out that the geopolitics associated with oil can particularly affect our imported inflation. "...The probability of a soft landing in the US economy has risen in recent months, and that might keep up the US demand for oil," it said.

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Expectations, upside risk to food prices

While inflationary expectations have moderated for both businesses and households, core inflation — non-food, non-fuel inflation — may continue to be sticky as the pass-through from industrial prices may come with a lag.

RBI has forecast elevated domestic prices for cereals and spices in the near term owing to supply shortages; milk prices are also expected to spike reflecting high feed costs, it said.

"In general, climate across the world has become increasingly erratic, further fortifying upside risks to food prices. A lot depends on industrial input prices: they may ease, but on the flip side their delayed pass-through to consumer prices may contribute to the stickiness of core inflation," it said.

The Survey pointed out even though the wholesale and retail inflation rates are converging, core inflation remains sticky, and there is a pickup in services inflation.

"Even as inflation abated at the wholesale level, there has been a pass-through of previously high input costs onto retail prices. Core inflation remains sticky at nearly 6 per cent and reflects the second-round effects of the supply shocks witnessed earlier this year. Further, with the recovery of demand, there has been a pickup in service inflation," it said.

Inflation trend in states

During FY23, ‘food & beverages’, ‘clothing & footwear’, and ‘fuel & light’ were the major contributors to headline inflation — the first two contributing more this fiscal than in the previous one, it said. Rural inflation has remained above urban inflation throughout the current fiscal year, reversing the trend seen during the pandemic years, with food inflation being a significant differential factor.

"The gap between rural and urban inflation was its widest in March 2022 due to a difference in the experience of food inflation. Urban areas experienced a sharper increase in food prices of vegetables and oils during this time as compared to the hinterlands," it said.

Retail inflation increased in most states in FY23 as compared to FY22. Telangana, West Bengal, Maharashtra, Madhya Pradesh, Haryana, and Andhra Pradesh saw especially high rates of inflation in FY23. Fuel and clothing were the major contributors to the surge in inflation, the Survey said.

Most states and Union Territories have witnessed higher rural inflation than urban inflation in the current year, mainly owing to marginally higher food inflation in rural areas.

Assam, Haryana, Madhya Pradesh, Manipur, Mizoram, Odisha, Uttarakhand, West Bengal, and Delhi experienced a higher rural inflation than urban inflation. In rural sectors of Haryana, Mizoram, and West Bengal it was because of higher ‘food and beverages’ and ‘clothing and footwear’ inflation. In rural sectors of Madhya Pradesh, Manipur, and Assam, it was due to ‘fuel and light’ segments. Food, clothing and fuel were the major contributors to higher inflation in urban areas of Bihar, Meghalaya, and Tripura.