Factory item prices must cool for lasting inflation relief

livemint.com:

India’s retail inflation in June was 4.8%, as per a recent data release. Since March, inflation has been under the target’s 6% upper limit, after breaching it for several months earlier. Retail inflation is the year-on-year change in the consumer price index (CPI), which is a weighted average price level for food, fuel, manufacturing and service items.

There is one lesson to be drawn from India’s inflation-targeting experience and especially high inflation post the covid pandemic: the prices of manufactured products hold the key to managing retail inflation. In the last three years, rising prices in the manufacturing sector not only outpaced services and the overall CPI, it has fully compensated for the slower price rise before the pandemic. The manufactured goods index is now at a similar level to that of the services price index and overall CPI index.

Going ahead, this is the sector to watch. First, a clarification: this article discusses drivers and not causes of inflation. Excess money in the economy for a sufficiently long duration causes sustained overall inflation.

Inflation drivers are typically cost-push factors or supply shocks that temporarily result in high or low price-rise in specific items. If a supply shock is positive, say an improvement in technology or an increase in low-cost imports, then it caps the price rise for that commodity. If a supply shock is negative, such as an uneven and inadequate monsoon for cultivated food, it will result in temporary high inflation in affected articles.