It's Getting Pricey

Inflation should now be a policymaker concern. Growth should have more fiscal than monetary push

- Sonal Varma

Transitory or persistent? Currently there is an ongoing and seemingly polarised debate globally regarding the current surge in inflation. Most central banks appear to view high inflation as transitory and have persevered with supporting growth.

In India as well, policymakers have taken a similar stance and prioritised growth throughout the pandemic, overlooking elevated inflation, and, in our opinion, rightfully so. However, the time has come to shift gears.

Since the pandemic commenced in February 2020, consumer price index (CPI) inflation has averaged at 6%, near the upper tolerance band of RBI’s inflation target of 4% (+/-) 2%. Yet, RBI tolerated higher inflation for what we believe to be good reasons.

Much of the rise in inflation reflected a combination of supply-side shocks. The disruption to supply chains and logistics resulted in retailers raising prices significantly above wholesale prices. The migration of workers returning to their hometowns led to labour shortages and higher labour costs.

The government announced tax hikes on petrol, diesel and alcohol. A broadbased rise in commodity prices added to cost pressures. In addition, there were statistical quirks due to data collection issues during the lockdown. All these factors more than offset the demand weakness, and led to high inflation, but mainly led by supply-side factors.