crisil: Easing input costs to keep retail inflation contained, says Crisil

2023-06-16 12:26:38

The fall in input costs may have positive implications for core inflation, which has proved stickierRetail prices are expected to increase at a slower pace than last year as an easing of input costs and slower-than-expected demand weigh on consumer inflation, according to a Crisil report.Wholesale prices, which are more amenable to global price pressures, may also remain low as global supply chain pressures ease, as per Crisil.

Crisil’s input-output index fell to a seven-month low, indicating that “the second-round effects of the high cost of production on CPI inflation may be fading,” the report noted.

“A sharper fall in input price pressures relative to output prices led to a decline in the index value to 1.01.”

An increasing ratio indicates input costs rising faster than output, leading to higher pass-through by companies to protect margins.

Crisil economists point out that the fall in input costs may have positive implications for core inflation, which has proved stickier.

“Core inflation in goods, particularly, may see more downside than upside, given easing costs of production and expected growth moderation in the current fiscal,” the note stated.

Data released by the government earlier this week showed that consumer inflation eased to a 25-month low of 4.25% in May, closer to the Reserve Bank of India’s target rate of 4%. Core inflation had remained flat at 5.15% in May.

On the other hand, wholesale prices dipped to a 90-month low of -3.48% in May.

The Crisil report points out that sluggish demand and lower global energy and commodity prices are expected to contain price pressures. Moreover, an easing of global supply chains is expected to help further.

“Advanced economies have weaker demand for inputs as their growth slows. An uneven recovery in China this year, following initial exuberance post lifting of restrictions, has further contributed,” the report noted.

However, downside risks persist.

“Sudden shocks from ongoing geopolitical tensions cannot be ruled out, or accounted for, at this moment,” Crisil said.

A fall in inflation to 4% for a sustained period is expected to raise expectations of a rate cut. The Reserve Bank of India held the policy rate at 6.5% for the second consecutive time at its June meeting.

Multilateral organisations, like the Organisation for Economic Co-operation and Development, are pencilling a rate cut in mid-2024.

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