A gradual easing of oil prices can be expected if pre-war equilibrium is restored. But, the question is whether or not producers will lower their final prices.
Crude oil prices remaining high for over 100 days present the main challenge for a benign inflation print, having already entered cost calculations of companies, as reflected in the wholesale price index. This has led to an increase in prices reflected in core inflation.
A gradual easing can be expected if the pre-war equilibrium is restored. The question, however, is whether or not producers will lower their final prices. Higher oil and gas prices have worked their way into prices of pesticides, fertilisers, paints, automobiles, glass, ceramics and other products. Restaurants have hiked prices across their menus and it is unlikely that these will be lowered when fuel supplies, and thereby, prices, normalise. It will take close to three months for restoration of normal supply if a permanent peace accord is signed by the warring sides.
A similar situation can be expected for airlines, which may not be inclined to lower fares fully even if ATF prices come down — their losses due to the conflict extend beyond fuel prices, in terms of rerouting to avoid flying over conflict-affected areas, for instance.
Therefore, even when the WPI trends downwards as oil and gas prices ease, the pass-through may not happen — at least not to a commensurate degree.
On the CPI front, things will be different. The oil impact is primarily a policy decision. When crude oil prices shot up, LPG prices were raised to an extent for consumers but fuel prices remained unchanged. After a point, excise was lowered, and, following that, retail prices were increased in three stages. Therefore, the inflation impact would be largely driven by what the government and oil-marketing companies decide when Brent reverts to a lower level (the weight of fuel products in CPI is 4.8%).
Coming to gold, the metal’s price movement is reflected in the personal care category of CPI (its weight in overall CPI is 1.2%)
A similar issue lies with gold. The personal care category of CPI is being pushed up by gold (it has a 0.62% weight in overall CPI), even though the price of gold has come down. This is due to the imposition of a higher duty on precious metals. Once again, price movement here and its reflection in the overall inflation for the year will depend on the call the government takes.
All this aside, food inflation remains a worry. The monsoon was delayed and overall rainfall may record a below normal level, complicated by the predictions of super El Nino effect July onwards. Agri-regions in the rain-shadow areas will likely be affected worse. Pulses, coarse cereals, and oilseeds are the product groups most likely to get affected, which means that, against last year’s low base, the price increases will be sharper. This means food inflation could come in well above 5-6% for the year. Throw in MSP increases, and benchmark prices for the market are likely to be high.
Whether the government rolls back some of the fertiliser subsidy being offered at present and lets prices increase to an extent also needs to be seen.
Globally, transportation and freight costs have gone up and will take time to return to the earlier normal. Opec may have agreed to increase output, but restoration of damaged energy infrastructure in the Gulf States will likely take many months if not years. Energy contracts, thus, will need restructuring, depending on the terms and prices prevailing in the market.
Finally, a conscious call has to be taken internally on retail prices of fuel. During the last spell of conflict, as well as the short-lived ceasefire when crude prices fell, retail prices were left unchanged. Will this policy continue?
Looking at things as they stand today, it is likely that inflation for the full year could reach 5-5.5%, especially as food inflation rises in the second half of this fiscal.
