Retail Inflation Likely to Remain at Elevated Levels in Coming Months, Says SBI Report

Retail inflation in the country is likely to remain at elevated levels in the next few months on account of supply constraints driven by labour shortage rather than due to fiscal deficit or other external factors, according to an State Bank of India (SBI) report.

The 'Ecowrap' report also suggested the Ministry of Statistics and Programme Implementation (MOSPI) should also take into account the online prices of products while computing retail inflation as more and more people are relying on online stores for their needs, especially after the outbreak of COVID-19.

It further said that MOSPI appeared to have underestimated the retail inflation, by including irrelevant items including services, unmindful of the fact that their consumption fell drastically on account of COVID-19 and subsequent lockdown.

As per the data released by the National Statistics Office (NSO), the retail inflation was 6.09 per cent in June.

"Based on our new weights, as per our SBI Computed COVID CPI (consumer price index), the actual headline inflation is much higher than the imputed inflation. Our June 2020 inflation is at 6.98 per cent, almost 90 bps higher than the imputed inflation of NSO... If NSO considers online prices, there would be further 10/15 bps impact on CPI inflation", said the report.

SBI's study said the pandemic accelerated the recent global trend of disinflation.

However, with the onset of the COVID-19 pandemic, India along with the majority of middle and low-income countries has been experiencing rising consumer prices.

"In the case of India, we believe that inflation will remain at elevated levels for the next few months due to supply-side constraints and labour shortage, rather than due to fiscal deficit and external factors, except crude," the report said.

However, the situation is extremely volatile and uncertain and the previously published numbers can see revisions.

In this context, it added the forthcoming RBI's Monetary Policy Committee decision will be a hard one to make.

However, with real consumption set to be adversely impacted, governments and central banks in respective countries will be more concerned with the welfare implications of the pandemic on real consumption, it said.

"To that extent, while an August rate cut looks difficult /touch and go, we still believe RBI could be looking through the CPI numbers through the cycle and not at a point in the cycle!," it said.

RBI Governor-headed MPC is scheduled to meet during August 4 to 6.

It is to be noted that the central bank had gone for off-cycle meetings of the MPC - first in March and then again in May 2020 - amid fast-changing macroeconomic environment and the deteriorating outlook for growth.

The MPC has cumulatively reduced the policy repo rate by 115 basis points over these two meetings.