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Salutary reminder: On Consumer Price Index

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Policymakers must focus on maintaining price stability given the volatile food and fuel costs

With just over two weeks left to the March 31 deadline for the government and RBI to complete the quinquennial review of the current inflation target under the monetary policy framework, the latest Consumer Price Index (CPI) reading provides a salutary reminder for policymakers to maintain a ceaseless vigil over price stability. Retail inflation, measured by the CPI, accelerated to a three-month high of 5.03% in February, data released by the National Statistical Office on Friday showed. The jump of almost 100 basis points from January’s 4.06%, while partly attributable to a base effect given that price gains had relatively eased in February 2020, is a clear signal that food and fuel costs continue to pose a threat to broader price stability in the economy. Specifically, the RBI’s early February prognostication of continuing pressures in the prices of pulses and edible oils has been borne out by the last two months’ CPI data. Inflation of both essential food products has persisted in the double digits during the period, and in the case of the latter, accelerated disconcertingly to 20.8% last month. Price gains with respect to two other key sources of protein, meat and fish and eggs, also remain stuck above 11%. And the deflation in vegetable costs, which had helped offset the generalised pressure in food inflation, also waned considerably in February to minus 6.7% from minus 15.8% in January. The upshot was that food and beverages as a combined category, with a weight of 54.2% in the CPI, witnessed an almost 160 basis points quickening in inflation to 4.25% last month, from January’s 2.67%.

Another equally worrisome source of inflationary pressure is the continuing upward trajectory in the prices of petroleum products. Transport and communication, which directly reflect these prices, saw inflation rocket by more than 200 basis points to 11.4% in February, from 9.3% the preceding month. Diesel, the main fuel for freight carriage, is now hovering around ₹85 per litre in many parts and will most certainly feed into the costs of everything requiring to be transported. Brent crude oil futures have surged by close to 40% in the three-month period through March 11 in the wake of output cuts by major oil producing nations, another worrying portent for inflation. With the RBI’s own researchers having so cogently laid out the case for persisting with the current flexible inflation targeting regime of ensuring that price gains stay within the 2% to 6% band in the central bank’s first Report on Currency and Finance in eight years, policymakers must stay laser focused on keeping price stability front and centre of their fresh framework for the next quinquennium. Any effort to dilute the focus in a purported bid to prioritise growth, risks putting the economy on a perilous path that may secure neither objective.

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