Inflation spike: A dive into the long-term reasons throws up some surprises

Contrary to popular belief, food items aren't among the biggest culprits in this space; palm oil and cotton are two items that have done much more to disrupt the WPI numbers over time

What are the long-term reasons for an inflation spike in India is a question to ask when the latest print for Wholesale Price Inflation (WPI) reads a record 14.23 per cent for November 2021. Instead of tracking monthly gyrations, these trends could also provide vital clues to the finance minister, her team at the North Block, and Parliamentarians of all shades, and also inform the householder how long and difficult the price rise could be. 

For instance, while the reasons for the highest ever WPI (since the new series began) seem to be vegetables and fruits in primary articles and textiles, paper and chemicals among manufactured items, some of the long-term trends are surprisingly counterintuitive. This requires dicing the inflation data into quarterly and annual series extending back for years to offer the answers. 

The surprise elements

Oils, for example, are the supposed chief culprit for the past ten years, which is not a surprise. But one of those is palm oil, with a weight one third of high speed diesel but a contribution to wholesale price inflation in recent years at a comparable high. While diesel has contributed about 0.2 per cent to the WPI, since July 2019, palm oil with a weight about a third less has actually contributed the same. “Given that crude oil prices are a pass through into the domestic economy, inflation in crude petroleum inched further to 91.74 per cent in November 2021 as compared to 80.57 per cent a month ago,” wrote Sunil Sinha, principal economist, India Ratings. The edible oil impact on inflation has however become far more striking, at about 700 basis points higher than the impact of the fuel group.  

At the other end, looking at the quarterly data since July 2019, potato, onions, tea or eggs rank among the bottom set of price movers. Despite the noise about supply shortage, their prices have come down quite often in this period. Tomato was an exception, a high-flyer, ranking just after fuel group and industrial items for its contribution to a rise in prices. 

But when the data set is extended further, to the trend for the last ten years, cotton yarn comes out as one of the consistent top ten contributors to price rise in the WPI. Vegetable prices, including those of potato, tomato, cauliflower or onions have remained soft coming out in the list of bottom ten contributors to WPI price increases. So did, electricity prices. 

For the purpose of this analysis, we assume that a rising trend in prices is an indication of sustained demand for the product. 

For policy makers then, cotton yarn and edible oils are some of the key items to keep a tab on to keep prices soft at the wholesale markets. In the past ten years, these along with the fuel group, as the data shows, were the chief reasons for price increases in the wholesale sector.  

Consumer price inflation

What about consumer price inflation? CPI printed at 4.91 per cent in November 2021, pushed up mainly by a rise in inflation for food and beverages, housing, clothing, and footwear. The decadal story is far more nuanced. In the last ten years, that is from when the new CPI was rolled in, vegetables have ranked as one of the bottom ten in terms of price increase. In other words, except for last year’s supply induced shortages, vegetables have had hardly any role to play in price increase. This year, despite the latest month data it is minus 12.1 per cent. 

Or take education. Or, Housing prices. Both started out the decade with hefty price increases. This was expected since in the new CPI their weights were increased with large weightage of 4.5 and 10.1. But tracking the CPI data for the decade shows, they have been one of the ten softest elements in the price increase in the consumer basket. The granular results are the efforts of deep dive by an amateur data enthusiast and offer fascinating insights.

The actual data is surprisingly at odds with successive consumer expectations survey of the RBI, where the supposed higher cost of education and housing has been often highlighted. 

The data set also has strong policy implications. Real estate lobbies have petitioned the government to keep general interest low. In this decade, India has gone through two spells of high and low interest rates. Yet house prices have not moved. The relatively low prices in the real estate sector are therefore an indication of sustained lack of interest by the buyers. The reasons must be explored elsewhere instead of efforts to keep interest rates low to spur buying of flats. 

The same data shows the perennial favourites of Indians, milk and its products have not seen much traction in price in this decade. 

The consistently rising element in the household budget is that of transport and communications. It has a weight of 8.6 in the CPI and has swung up to an uncomfortably high of 10.1 per cent this year, over 8.4 per cent last year. 

Spike in snacks and shoes 

For policy makers, the options for chasing are evident. Since it is difficult to reduce the price of transport as India’s urban areas expand geographically, a transport subsidy for the poorer segments can be a powerful anti-inflationary measure. Since long-distance rail fares have not moved much in this period, the lesson is particularly applicable for states, since local transport is a state subject. 

Not surprisingly, the health expenditure of the Indians has shot up this decade. It has averaged annually 5 per cent in most years and has risen 6.7 per cent this year. Slicing the data by quarters shows as soon as Covid struck the price index for the sector has begun to move up and has averaged above 5 per cent since then. So cumulatively, the rise is substantial. 

Pulses, on the other hand, have been on a yo-yo ride through the decade. Prices climbed by 25 per cent and 21 per cent in the early years of the decade but then fell by 19 per cent and 11.7 per cent in the next few years before rising again by 17.3 per cent and 8.3 per cent. 

Slicing the CPI data by quarters offers some more insights. In sync with the high price impact of palm oil in the WPI, the CPI too shows edible oil and fats have of late been the top reasons for flaring up of CPI. It accounted for more than a quarter of the price increase this year and since July 2019, it has been the highest reason for the rise in the consumer prices, outscoring even the fuel group. If the rise in edible oil prices were to be contained, India would have largely won the war against inflation for the households.

The trends in private consumption expenditure, as demonstrated by the price rise, is somewhat amazing. Footwear, for instance, with a weight of just one in the CPI basket, has consistently been one of the top contributors to price increases in the same period. Even in the Covid-hit year, it accounted for 7.4 per cent of the price rise, just as it has this year, at 7.9 per cent. Prices of footwear have remained above 5 per cent of the total CPI for the past five years, almost at par with the price rise for health expenditure, and running above the price trend for meat and fish. 

The quarterly data shows there has also been a sharply rising trend in the prices of prepared meals, snacks and sweets through the same period. There is no reason to believe that supplies of either footwear or of prepared meals and snacks were hit by supply shocks. Yet there has been a sustained steep rise in their prices since July 2019. While aggregate private consumption expenditure in the economy has declined by six per cent year on year in nominal terms as per latest GDP data in FY21, the ability of the producers to push up prices, despite the slack merits a deeper study.