Context: With Covid affecting factory floors, supply needs to be managed — item by item, sector by sector, since it has a direct impact on inflation in the country.

Decoding inflation during pandemic

• High Core inflation: Inflation has hardened not only because of higher food and fuel prices, but the core inflation, which excludes these volatile items, has remained firm.
  • In March 2020, 80% of the core basket contributed half a percentage point or more to consumer price index (CPI) inflation.
• Rise in Wholesale Price Index (WPI): WPI inflation has climbed up steadily since rising to an 8-year high of 7.4% in April 2021, beating CPI inflation.
  • The rise in wholesale prices is driven largely by global factors as expectations of the US and China-led global recovery get ‘priced into’ commodity markets like metals, plastics and rubber.
  • Global edible oil prices went up by 86% in March 2021 and got partly captured in the 25% domestic inflation in the ‘fats and oils’ category of the WPI basket.
• Implications: There are two implications for the above-discussed inflation characteristics:
  • Taming retail inflation now is not just about fixing supply and distribution chains: This is because while earlier the rise in CPI was based on supply-side constraints, but now the WPI itself has risen, indicating the rising factory gate prices
  • If the second wave creates more distribution problems, retail inflation could rise sharply more since underlying wholesale prices are already elevated.

Factors responsible for a potential rise in future inflation: There are fundamental differences in inflation from the 2020 phase -

• Higher infection load: Factories shutting down because of risk of infection among workers.
• Higher rural footprint: 90% Backward Region Grant Fund districts suggests that the active caseload is over four times than in the first wave (the first wave, which was urban cantered).
• Risk of food production cycle disruptions: Adversely impacting Kharif operations and pressure up food prices.
• Spill overdue to migration: Bringing behavioural changes since the now migrant market would become more ‘localised’ — migrants not wanting to travel too far from their villages in the future.
  • In medium term, this could lead to sharp wage increases in regions that depend on guest workers. Thus some form of ‘disruption insurance’ is imperative.
• Industrial disruptions due to diversion of oxygen: Affecting supply chains for a number of sectors like engineering goods, auto components and fabrications triggering knock-on effects on downstream sectors such as car and white goods manufacturers.
• Limited scope for RBI’s toolkit: As rising inflation during a pandemic is almost entirely supply-driven.

Conclusion: The only way to prevent full-blown stagflation is to manage supply — item by item, sector by sector. That is the remit of both the central and state governments.