After the Wholesale Prices Index showed a marginal decline, the Consumer Price Index – which is what bites you and me – has also shown a decline in June, falling from 10.36 percent in May to 10.02 percent.
So is the worst over? Is inflation on the way down for sure?
Certainly not. Just as one swallow does not make a summer’s day, the declines registered in June are a mere blip and not the real thing.
The June inflation number looks good because of the base effect. Last June was bad, and so this June looks a bit better. It could be the same story in July as well, when the base effect remains high. But the CPI is still in double-digits.
The signals for the future are bad — and could get worse. One is the monsoon failure in large parts of the country, and we are already past mid-July. Not only staples, but other crops like oilseeds, cotton, sugarcane and pulses are set for a spike, since their output will be impacted more than rice and wheat.
According to Ashok Gulati, Chairman of the Commission on Agricultural Costs and Prices, there has been serious shortfall in western, central and southern India, but the east has been spared. At the very least, agricultural yields will fall even if crops are not ruined. The Met Office has confirmed rainfall deficiency in July.
Food inflation has actually risen in June — possibly in anticipation— from 10.66 percent in May to 10.71 in June. But it could get worse. In June, pulses inflation was at 9.34 percent, oils and fats at 16.58 percent, vegetables at 27.60 percent, eggs, fish and meat at 11.65 percent and milk and products at 12.75 percent. These parts of food inflation are already elevated, and these are expected to worsen. Oils and pulses will be worse impacted by the bad monsoon. And when monsoon is bad, milk prices invariably spike. There could be more bad news to come.
And remember, food accounts for almost half the weight in the combined rural plus urban CPI.
Moreover, we are still to see the government raise diesel and kerosene prices – the much-promised “hard decisions” in the budget and which we are still to see. Meanwhile, Brent crude prices have both fallen and risen back above $100 a barrel – and we still haven’t reformed our fuel prices. Expect another spike when that happens.
Note: fuel accounts for nearly 9.5 percent of the CPI.
Moreover, rural inflation is still rising, while urban inflation is falling – at least according to the CPI. While urban inflation fell from 11.52 percent in May to 10.44 percent, rural inflation went up from 9.57 percent to 9.74 percent.
So should city-clickers be happier? Not quite. Urban inflation has fallen due to an important base effect in housing. Apparently, the base for the housing group – which gets a weight of 22.53 in urban areas – went up in June 2011 when house rent and other data were updated. Rent data is collected once in six months, and takes six months to collect too. (The housing group includes house rent, water charges, and repairing charges).
When people can’t afford to buy houses, one can only expect rents and water charges, among other things, to go up. Given labour costs, repair charges related to housing can also only rise.
In the coming months, if food, fuel and housing costs rise – and these collectively account for nearly two-thirds of the CPI – it is doubtful that inflation has really peaked.
So grit your teeth and tighten your belts.