Extension of coronavirus lockdown set to keep retail inflation elevated

Retail headline inflation in March 2020 fell to a four-month low of 5.9 per cent, 0.7 per cent lower from a month ago and 3.1 per cent higher than the corresponding month a year ago

The extension of the nationwide lockdown to curb the spread of Covid-19 pandemic is set to keep retail headline inflation high in the coming months.

A report by CARE Ratings expects food inflation to be higher due to the entension of the lockdown till May 3. This, in turn, could adversely impact food supply chains. Despite mellowing international crude oil prices, taxes on petrol and diesel could keep prices of commodities at elevated levels. Fuel inflation is also likely to escalate on account of the low base effect though core inflation is slated to be benign in the months ahead.

Retail headline inflation in March 2020 fell to a four-month low of 5.9 per cent, 0.7 per cent lower than a month ago and 3.1 per cent higher than the corresponding month a year ago. Inflation for the month has been notably lower than CARE Ratings’ estimate of 6.5 per cent. It is to be noted that on account of the nationwide lockdown following the spread of Covid-19, fieldwork for price collections had to be suspended and 66 per cent of the price quotations were received while the price behaviour of the remaining price quotations was established based on internationally accepted methodologies.

“Retail inflation has averaged 4.8 per cent during FY20, 1.3 per cent higher than a year ago. Inflation during the first half of the fiscal stood at 3.3 per cent and has seen a perceptible spike in the second half with an average growth of 6.3 per cent. Retail inflation of 4.8 per cent during the fiscal can be largely attributed to significant rise in food prices with notable increase seen in case of vegetables, pulses, oils and elevated inflation seen in protein-based items like milk, meat and fish. The unfavourable base effect in H2 of FY19 also drove inflation higher in H2 of FY20. Core inflation (headline inflation less food and fuel) has remained benign during the year while fuel inflation has been volatile ranging between -2.2 per cent and 6.6 per cent," the report noted.

In March 2020, food inflation grew at the rate of 7.8 per cent as against 0.7 per cent in the corresponding month of last year and 9.5 per cent in February 2020. On a month-on-month basis, food inflation eased due to a decline in inflation of vegetable commodities and eggs. Prices of meat and eggs fell in March owing to lower demand for these food products amid growing coronavirus fears. Moreover, inflation in pulses moderated from 16.6 per cent in February to 15.9 per cent in March this year. In contrast, inflation in case of cereals rose to three-month high of 5.3 per cent in March whereas milk inflation was steeper, touching a 57-month peak of 6.47 per cent in the same month.

During FY20, food inflation averaged at 6.1 per cent as against 0.7 per cent in FY19. Most of this price upsurge was fuelled by a spike in vegetable prices owing to unseasonal rainfall.

All states barring Karnataka and Delhi recorded higher inflation in March 2020 compared to the same month in last year. Ten out of 20 states registered an inflation rate higher than the national average of 5.9 per cent.