​Easing prices: on the inflation data

The inflation data for May show just how much can change in one month. Retail inflation came in at a 75-month low of 2.8% in May, with easing food prices the main reason behind this fall. Wholesale inflation, too, slowed to just 0.4%, the lowest in more than a year. The primary driver here, apart from falling food prices, was a drastic contraction of 12.4% in crude oil and natural gas prices. An oversupply of oil and a slowing global economy had meant that the months leading up to May had seen oil prices fall considerably. With India importing about 80% of its oil requirement, this eventually translated into lower wholesale inflation in the country. The Reserve Bank of India (RBI) had, in its monetary policy announcement on June 11, predicted that inflation for the year would come in at an average of 3.7%, down from its forecast of 4% in April. According to some analysts, retail inflation in June could come in as low as 2% — the lower end of the RBI's comfort band since current factors impact the data with a considerable lag. Overall, the feeling until not too long ago was that inflation would continue to ease. But then Israel attacked Iran, and the monsoon's progress across the country slowed, both developments that are likely to affect the two key factors, fuel and food, that had, until now, led to the fall in overall inflation.
Oil prices jumped as much as 8% in a single day following Israel's attack on Iran on June 13. The Hindu had, last week, reported that an escalation of tensions between the two countries and a resultant blockage of the vital Strait of Hormuz could result in a 40%-50% increase in shipping costs for Indian exports and imports, and could impact India's oil supplies from key sources such as Iraq, Saudi Arabia and the United Arab Emirates. This is not an unlikely eventuality, either, with Commerce Ministry officials set to hold a meeting this week with trade and shipping sector stakeholders to discuss how the government can ease their distress. Costlier inputs, especially oil, will eventually move the inflation needle back up. The monsoon has picked up pace again, according to India Meteorological Department officials, but it's still early days. In the past, even though the overall monsoon has been satisfactory, its uneven spatial distribution has left several agricultural areas parched. It is far from certain that food prices will continue their downward trajectory. In its last monetary policy meeting, the RBI shifted its stance to 'neutral', indicating that it was as ready to raise interest rates as it was to cut them. This was prescient, as the last few weeks have shown just how nimble monetary policy has to be in these increasingly unpredictable times.

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