Inflation In India Was Triggered By Supply Shocks But Absorbed Broadly: RBI Article

It took two weeks to knock off India's planned inflation trajectory.

With the worst of the pandemic over by February 2022, the Monetary Policy Committee had projected inflation at 4.5% during FY23, down from 5.5% in FY22. Instead, inflation went the other way.

The start of the Russia-Ukraine crisis in late February knocked over supply chain dominoes that precipitated a return of inflation.

November data indicated that consumer price inflation eased to an 11-month low of 5.88%, down from 6.77% in October 2022.

While the surge in inflation was kicked off by multiple supply-side shocks, its eventual absorption into contact-intensive services made it more persistent, according to an article co-authored by RBI Deputy Governor Michael Patra, and other central bank executives including Asish Thomas George, GV Nadhanael, and Joice John.

"What started as a shock to food and fuel prices got increasingly generalised over ensuing months. Unprecedented input cost pressures got translated to output prices, particularly, goods prices in spite of muted demand conditions and pricing power," the article said.

As the conflict cooled down, commodity prices declined. But a pick-up in domestic activity allowed businesses to pass on pent-up input costs—especially in services—which made inflation more sticky, it said.

"In India, the prominence of food and fuel in the consumption basket amplifies the dominance of supply-side shocks and spillovers to the formation of overall inflation," the article highlighted.

Price build-ups in the core inflation category have also been persistent across sub-constituents, according to the paper.

Clothing, transport, communication and personal care were the initial components to tick up. But price pressures became progressively broad-based and eventually also seeped into services, household goods, health, education and housing.