Sticky Inflation and January Spike

Sticky Inflation and January Spike

Subject : Economy

Section :Inflation and unemployment

Concept :

• In January, consumer price inflation hit a three-month high of 6.52 percent, compared to 5.72 percent in December, driven by a significant increase in cereal prices and stickiness of core inflation.

What contributed to the latest spike in inflation?

• Rise in food prices: With food accounting for 46 per cent of the overall CPI basket, a rise in food inflation from roughly 4 per cent in December 2022 to more than 6 per cent in January 2023 has played an important role in overall inflation going up.
• Cereal inflation is soaring high: Within food, one component that has proved rather stubborn is cereal inflation. Between May and December 2022, year-on-year cereal inflation nearly doubled from 5 per cent to 14 per cent. In January 2023, this increased to 16 per cent. Within cereals, inflation in wheat has been steadily going up. Between May and December 2022, wheat inflation increased from 9 per cent to 22 per cent. It increased even further to 25 per cent in January 2023.
• The steep rise in wheat prices reflects shortages: Data from the Food Corporation of India shows that stocks in government warehouses declined. The government has recently approved a release of three million tonnes in the open market. However, this is insufficient to restore market supplies.
• Stickiness of core inflation: Second, core (non-food, non-fuel) inflation in January came out to be 6.2 percent. This is consistent with the unyielding core inflation of 6 per cent for nearly three years now. A persistently high core inflation implies that price pressures have become entrenched in the system.
• External factors also play a role: Inflation in developed countries continues to be high (6.4 per cent in the US; 8.5 per cent in the EU; 10.5 per cent in the UK). India is importing some of this elevated inflation through international trade in goods and services.
• Moreover, with China gradually opening up its economy after nearly three years of zero-Covid restrictions, commodity prices are likely to go up, which could exert renewed pressures on India’s inflation.

Core Inflation

• The core inflation rate measures rising prices in everything except food and energy.
• That’s because gas prices tend to escalate now and then. Higher gas costs increase the price of food and anything else that has large transportation costs.

Is India’s inflation turning out to be sticky?

• Inflation is taking longer than expected to fall essentially because higher food and fuel prices have seeped into broader economy and made other things costlier.
• India is not the only country facing sticky inflation – many others including USA and European nations are struggling to extricate themselves from sticky inflation.

Sticky Inflation

• Sticky inflation is an undesirable economic situation where there is a combination of stubbornly high inflation, (and often stagnant growth).
• Sticky inflation is often associated with cost-push factors, i.e. factors which cause a rise in the inflation rate but also lead to lower spending and economic growth.