What Explains the Recent Bump in India's Inflation?

While food, housing and petroleum inflation all played a role, a SBI research report also notes that the inflationary impact of GST may have been than what was expected.

New Delhi: The goods and services tax (GST) regime and a rise in food and housing prices have pushed India’s consumer price inflation to a five-month high in August 2017.

Over the last five months, CPI (consumer price index) inflation has touched a high of 3.36% in August, compared to 2.17% in July 2017 – and 2.47% in August 2016.

According to a market note put out by SBI research, the 190 basis points jump in headline CPI inflation over the last two months can be attributed to food (151 basis points), GST (12 basis points), fuel (18 basis points) and housing (9 basis points).

“Housing and GST have added an estimated 20 basis points to headline inflation number,” SBI chief economist Soumya Kanti Ghosh

The data appears to run contrary to the government’s claims. In May 2017, finance minister Arun Jaitley  stated that “GST would not be inflationary”.

The SBI report appears to acknowledge this and notes: “The impact of GST has been more than market consensus as it seems that the benefits of input credit will probably take much longer to percolate and bring down the impact of GST on prices”.

What aspects of GST have impacted a rise in prices? The ‘core of core inflation” includes a category called miscellaneous goods, which comes with a total weightage of nearly 20%.

“This category consists of items like gold, silver, items of daily use (shampoo, toothpaste, shaving cream etc.), consumer appliances which have witnessed an increase in tax rates post GST. The weightage of these items in overall CPI comes to around 3%,” the report notes.

Housing inflation has also witnessed increase of 9 basis points, perhaps due to the effect of 7th central pay commission CPC implementation

                                                       Arithmetic of Inflation
Jul’17-Jun’17 Aug’17-Jul’17 Cumulative Headline impact
All Groups (CPI) 0.90 0.99 1.90 190 basis points
Food and beverages 0.77 0.73 1.51 151 basis points
Housing 0.02 0.07 0.09 9 basis points
Petroleum inflation 0.07 0.11 0.18 18 basis points
GST (Total) 0.03 0.09 0.12 12 basis points
GST (Health) 0.02 0.02 0.04 4 basis points

The report also crucially notes that while usually, on average, rural inflation is higher than urban inflation by 89 basis points. However, in recent times, the ‘food and beverages prices’ segment in rural and urban areas have begun to “track each other closely”.

Also, in recent months, fuel and light inflation in urban areas have increased significantly.

“The rise in fuel inflation in urban areas may be due to the LPG price hike in non-subsidized cylinders, which mainly used in urban areas,” the SBI  report adds. 

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