The Pain Of The Consumer

High inflation will first reduce discretionary spending and may have a bigger second-round impact

- Sakshi Gupta

Inflation – as measured by the consumer price index – rose to a 16-month high in March 2022 and is widely expected to have climbed north of 7.5% year on year last month. Even the most conservative projections show that inflation could end up averaging significantly above 6% this year – which would be the highest in the last seven years.

It’s true that some ugly inflation periods have come our way over the last two years, usually coinciding with pandemic waves and lockdowns. But while the problem then was primarily one of the supply-side disruptions due to the pandemic, this time a trifecta of factors has hit inflation, namely higher global commodity prices, supply-chain disruptions, and signs of demand-side pressures beginning to creep in, especially in certain contact-intensive sectors.

The biggest trigger of course has been the sharp rise in commodity prices – driven by geopolitical tensions – making everything from fuel to food more expensive for households. Global oil prices are up by 15% since February, pushing domestic pump prices by Rs 10 per liter for petrol and diesel each, while food inflation rose by more than 7% year on year in March 2022. With no imminent end in sight for the Ukraine-Russia war, these inflation impulses could linger on for much longer than previously anticipated.