LPG price cut may clip some points off inflation: Economists

The across-the-board reduction in LPG cylinder prices on August 29 has raised the hope of a decline in the retail inflation rates by 20-30 basis points and, as a result, the September figure might crawl down below 6%, economists have told The Economic Times. A basis point is one-hundredth of a percentage point.

The government slashed prices of LPG cylinders prices by Rs 200 for all customers. For Ujjwala Yojana beneficiaries, cylinders became cheaper by Rs 400. However, it might not alter the overall picture of high inflation, one of the key threats to which is the erratic and deficient monsoon and food inflation.

Incidentally, the retail inflation figure in July shot up to 7.44% from a far sober 4.81% in June, delivering a shock to policymakers, driving them to brainstorming sessions on how to control the beast.

The food inflation of 11.5% was the main culprit and the government slapped a number of measures to ensure supply of rice and vegetables such as tomato and onions in the market to tame prices. The LPG cut is expected to add to the cooling efforts.

“Our September estimate assumes a further decline in tomato prices and incorporates the impact of LPG price cut,” said Gaura Sengupta, economist, IDFC First Bank. According to him, retail inflation might sober down to 5.6% in September. Paras Jasrai, senior analyst, Ind-Ra, thinks the cooling impact of the LPG prices might be 10-20 bps in the annual rate. “The new measure would be especially helpful for the lower income strata which is battling high food inflation,” he pointed out.

On the other hand, Madan Sabnavis, chief economist, Bank of Baroda, thought the impact of LPG price cut on inflation would be marginal at around 0.26 basis point.

An analysis by the newspaper showed that LPG prices were cooling off even before the reduction of cylinder costs. Inflation in LPG had declined to 4.9% in July. It was 11.8% in the April-June quarter of this year and 18.3% in the comparable quarter of 2022-23.

However, inflation concerns remain and economists are almost certain that the retail inflation figure would remain elevated above the RBI’s comfort level of 6% in August too.

An ET poll of 17 economists last week pegged the median inflation forecast for 2023-24 at 5.5%, a shade higher than RBI’s estimate of 5.4% for this financial year.

Economists have pointed out that overall there are upside risks to inflation mainly from the vagaries of the monsoon that could lead to supply side problems.

“The risk to our inflation estimate is from uneven monsoon performance, with August rainfall deficit tracking at a historical high. The rising strength of El Nino has resulted in a 33% rainfall deficit in August,” Sengupta pointed out. Global conditions, too, were not too conducive for inflation in India.

“The upside risk to food inflation also stems from a risk of higher pass-through of the recent sequential uptick in global vegetable oil prices (12.1% month-on-month) into the domestic consumption basket, thereby adding to imported inflation,” said Rajani Sinha, chief economist, CareEdge, said in a note.