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Rising Commodity Prices and Production Bottlenecks Drive Inflation in India

Rising Commodity Prices and Production Bottlenecks Drive Inflation in IndiaInflation has been on the rise in recent times in India. The Wholesale Price Index (WPI) recorded an all-time high of 12.95% in May 2021 as compared to -3.37% in May 2020. Consumer Price Index (CPI) also reached a record level of 6.3% in May 2021 as compared to 4.3% in April 2021 and 6.26% in May 2020. Retail Inflation has crossed the 4% +/-2% target which was set by the Reserve Bank of India (RBI).

There are multiple factors that are contributing to the rise in inflation. WPI inflation has been on the rise over the last 5 months since January 2021 primarily due to the low base effect and a significant increase in prices of commodities like steel, copper, and crude oil.

WPI Inflation over the last 3 months (%)

Major Groups March 2021 April 2021 May 2021
All Commodities 7.89 10.49 12.94
      i) Primary Articles 7.28 10.16 9.61
    ii) Fuel & Power 9.75 20.94 37.61
    iii) Manufactured Food Products 7.84 9.01 10.83
Food Index 5.63 7.58 8.11

*Source: Ministry of Commerce & Industry

Due to global economies recovering, there has been a spike in Commodity Prices which is accelerating retail inflation. Food Inflation in May 2021 increased to 5.01% as compared to 2.02% in the last month, this is also the highest it has been since December 2020. Data released by the Ministry of Statistics and Programme Implementation revealed that fuel prices recorded inflation of 11.58%, transport and communication saw inflation of 12.38%, edible oils 30.84%, and pulses at 9.39% in May 2021.

Production side shortages due to lockdown are also contributing to inflation. 

Inflation is expected to continue on an upward trend due to continuously rising crude oil and commodity prices globally as developed countries are opting to complement financial stimulus packages to encourage economic recovery. Continuously rising inflation levels could be a cause of concern as this could cause bond yields to further rise to make government borrowing costlier. Also, a continuous increase in inflation could cause the central bank to increase interest rates and it may have to reconsider its accommodative stance though any change is quite unlikely as India gradually recovers from the second wave.

The post Rising Commodity Prices and Production Bottlenecks Drive Inflation in India appeared first on Nivesh.



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