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DAILY NEWS ANALYSIS

  • 19 February, 2021

  • 5 Min Read

Inflation- Its impact on the macro economic stability

Inflation- Its impact on the macro economic stability

Introduction

  • Consumer Price Index (CPI) rose by 4.06% in January, marking a deceleration for a second straight month to a 16-month low.

Reasons in decline of retail inflation

  • Bumper kharif crop: The Consumer Food Price Index reflected a gain of a mere 1.89% last month as vegetable prices saw a disinflation of 15.8% and cereal prices eased considerably for a second month in the wake of kharif crop arrivals.
  • Good rabi harvest: Rising prospects of a good rabi harvest
  • Vegetable production: Larger winter arrivals of key vegetables
  • Avian flu fears: Softer egg and poultry demand on avian flu fears.

Associated risks with low inflation

  • While inflation in pulses and products was at 13.4%, that for oils and fats stood at 19.7%. Eggs and meat and fish — two other key sources of protein — both posted double-digit rates of 12.9% and 12.5%, respectively, with price gains in the former barely registering any telling impact from the avian flu outbreak.
  • From automobile manufacturers to builders, rising raw material costs are beginning to force them to pass on the impact to the end consumers.
  • The latest IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) points to the sharpest increase in purchasing costs for more than two years as ‘a lingering supply-side squeeze’ fanned inflationary pressures and manufacturers raised their product prices at the fastest pace in over a year.
  • Add to the mix the unrelenting and dizzying climb in transportation fuel prices to newer and newer record highs in recent days and the outlook for inflation becomes distinctly darker.
    • Diesel, the main fuel for freight carriage, has now exceeded ?80 per litre and is bound to feed into prices of almost everything being transported across distances — from fresh produce to intermediate and finished industrial goods.

Conclusion

  • With banks still flush with liquidity, policymakers need to maintain a strict vigil to keep inflation from resurging and posing a threat to macro-economic stability.

Read more about Inflation- Click here

Source: TH


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