Union Bank of Switzerland Flags Inflation Woes

Rising costs of edible oils and protein-rich foods boosted retail inflation to a six-month high of 6.3%

Union Bank of Switzerland Flags Inflation Woes
Union Bank of Switzerland Flags Inflation Woes
PTI - 25 June 2021

Economists at Swiss brokerage Union Bank of Switzerland (UBS) Securities have cautioned the country faces additional upside risks from inflation, which is expected to average 5 per cent this year, following the surge in consumer price index (CPI) to 6.3 percent in May and wholesale inflation to the new high of 12.94 per cent. Rising costs of edible oils and protein-rich foods in May boosted retail inflation to a six-month high of 6.3 per cent, breaking RBI’s comfort zone and making interest rate cuts unlikely in the near term.

The wholesale inflation surge in May was driven by price of fuel, which exceeded the Rs 100 barrier in numerous states. While crude oil has surpassed $70 per barrel, manufactured goods costs also rose due to a commodities price increase, as well as the low base last year due to the lockout.

Food inflation jumped from 1.96 per cent to 5.01 per cent in May, while CPI climbed from 4.23 per cent in April to a six-month high of 6.3 per cent. Earlier in November 2020, retail inflation had reached a new high of 6.93 per cent.

The Wholesale Price Index (WPI) inflation rate was -3.37 per cent in May 2020, and 10.49 per cent in April 2021. WPI has increased for the fifth month in a row. In a statement, Tanvee Gupta Jain, the chief India economist at UBS Global Research, cautioned, “CPI inflation would continue over RBI’s medium-term goal of 4 per cent and will average 5 per cent in fiscal year 2022 with additional upside risks.”

She anticipated that the CPI trajectory could get affected in the short term, due to any seasonal increase in fruit and vegetable prices during monsoons, supply-side interruptions owing to recurrence of pandemic cases, its impact on mobility, along with movement in global commodity prices and input cost pressures.

Except for edible oils, which India imports in huge amounts, the study adds that India is generally self-sufficient in food production and is really a net agri-exporter. She claims this minimises the immediate impact of increased global commodity prices on domestic food costs, but the indirect influence will take longer to manifest.

The government has requested that RBI keep retail inflation at 4 per cent, with a 2 per cent cushion on each side. Since the inaugural meeting of the Monetary Policy Committee in October 2016, CPI inflation has surpassed the upper range of the inflation goal roughly 10 times.

With risks generally balanced, RBI forecasts CPI at 5.1 per cent in fiscal year 22 — 5.2 per cent in the first quarter 1, 5.4 per cent in the second quarter, 4.7 per cent in the third and 5.3 per cent in the fourth.

It should be emphasised that as a result of the global economy’s recovery following the reopening after the first and second waves, increasing inflation has been a source of concern for policymakers in general and central banks in particular.

Because prices are driven by restricted supply against a backdrop of weak domestic demand, several central banks and governments have responded to increased food, energy, and commodity price inflation using non-monetary measures.

Policymakers may be less willing to grant possibly temporary price increases the benefit of the doubt if central banks contemplate policy normalisation, as an increasing supply of vaccinations reduces threats to growth.

This is especially possible if multiple distinct possibly transitory pressures occur at the same time, according to the UBS study, which also forecasted inflation concerns for nearly all Asian countries, as well as advanced western markets.

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