Rising crude oil prices pose upside risk to inflation

Rising prices of commodities such as crude oil pose an upside risk to inflation, the government has said. Increased logistics cost is another factor behind the risk of price rise. The government is confident that a normal monsoon and further opening up of the economy will ease inflationary pressures.

Prices of global crude oil hit $77.16/barrel on July 5, its highest since 2018.

The Reserve Bank of India (RBI) latest survey conducted in May suggested that India’s one-year ahead inflation expectations of households have shot up to 10.9%. In March it was 10.2% and the jump can be attributed to the crushing second wave of the Covid-19 wave.

Govt response

The finance ministry’s monthly economic report took cognizance of the rise in food inflation in the urban areas but didn’t mention anything much about the skyrocketing prices of petrol and diesel. With wholesale price inflation hitting new highs of 12.9%, the highest in almost a decade, and retail inflation at a six-month high of 6.3%, the RBI had to hold further rate cuts.

The Finance Ministry expects various economic measures the government has undertaken to boost consumption along with capex, and restore balance in the economy.

The Ministry also said that localised lockdowns that were imposed on states and districts with the highest positivity rate could have resulted in disruptions in supplies of goods and services, thus contributing to inflationary pressures. The Ministry added that inflationary pressures would be mitigated by a combination of factors such as a productive southwest monsoon, supply-side interventions in essential commodities, the gradual opening of states and a fall in active cases.

As per RBI’s projections, Consumer Price Inflation (CPI) for the June quarter will be 5.2%. It is expected to rise slightly to 5.4% in the September quarter and subsequently fall to 4.7% in the December quarter and rise again to 5.3% in the March quarter of FY22.