Inflation On The Rise: Is There A Reason To Be Worried?


The inflation rate in May was a 21-month high of 5.76% and significantly above the market consensus. Inflation which had more or less been reined in the past few months again started rearing its ugly head for the past couple of months. Economists and expert will tell you that this high inflation rate is mostly due to higher prices of food grains and fuel. The double digit spike up in the vegetable prices was a key contributor to this number. While a timely and adequate monsoon alongwith constructive governments measures can bring the numbers down, the question is how does it affect the average consumer and why you need to follow the inflation rate?
Well right at the behest, the biggest uncertainty is for the interest rate outlook. As the RBI has signaled the last time, an upward trajectory in the inflation outlook will impact the interest rate action. It is exactly for this reason interest rates were on hold this year after 5 consecutive cuts since 2015. Further cuts are also subject to the future inflation outlook and overall positioning of the pricing parameters over the next few years.
The expectation is that the relatively higher than normal monsoon will help bring down the prices of the vegetable and hence they will be helpful in cutting down the pace of the inflation spike and perhaps bring relief to the average customer whose weekly budget is spiraling upwards as a result of this.
Another factor that contributes to the ever rising prices is the role of the middlemen in manipulating vegetable prices during crisis situation like this. As was the case the last time onion prices spiked up, the average consumer reeled under the impact of high prices even when wholesale rates came down significantly.
It is for this reason that the RBI Inflation survey could also be of benefit. The survey seeks qualitative responses from households on price changes in the next three months as well as on an annual basis. This gives the RNI a quantitative and qualitative insight on the current, the three- month and one-year inflation rate expectations. The outcome of this survey is also expected to impact the overall interest rate policy of the central bank.

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