Firms starting to pass on rising costs amid pick-up in demand: RBI study

Report says the gap between output and input prices widened during the pandemic, particularly after the first Covid-19 wave

With a pick-up in demand, companies in the manufacturing and services sectors have begun to pad up their sale prices with a part of rising costs, shows an RBI study. The report adds that there is need to be watchful of about the impact of input price pressure amid continued global uncertainties.

Higher fuel, raw material, and transportation costs and other supply chain-related constraints have driven input prices up. The rise has been broad-based with the repeated waves of the pandemic, and has been aggravated further by the war in Europe, according to the study published in Reserve Bank of India’s September 2022 bulletin.

Referring to the transmission of input costs in Indian conditions, it said output prices did not rise as rapidly as input prices due to persistent slack in the Indian economy during 2020 and 2021. The gap between input and output prices widened during the pandemic, particularly after the first Covid-19 wave.

The passthrough from input to output prices builds over time, with the long-term coefficient in the range of 0.26-0.27. Besides, higher input prices have a quicker transmission and stronger impact on headline inflation than on core inflation.

RBI’s “state of economy” for September 2022 said retail inflation, or CPI, edged up to 7 per cent in August from 6.7 per cent the previous month, while headline inflation moved by about 30 basis points between July and August. Core inflation softened marginally to 5.9 per cent from 6 per cent during the previous two months.

In terms of geographical distribution, rural inflation (7.2 per cent) was higher than urban inflation (6.7 per cent) in August. Across states, there has been wide variation in inflation rates. Goa and Manipur recorded below four per cent inflation, while Gujarat, Telangana and West Bengal had inflation in excess of eight per cent.