Is high inflation a “transitory hump”? Does it matter?
For several months now, households across the country are seeing their expenses increase as retail inflation rises across both consumer perishables and durables.
Prices across most household goods such as furniture, furnishings, utensils, stoves and across several consumer durables such as television sets, scooters, laptops and cars, are all rising at a quicker pace. This, together with higher prices of everyday items like gas and cooking oil, mean that household budgets are getting stretched.
Across the consumer durables category, such as almirahs, refrigerators, television sets, motor cycles, scooters, inflation is above 6%. You are luckier if you’re in the market for an air conditioner, a washing machine or a car, where it’s relatively lower.
Overall, retail inflation was at 6.26% in June, declining marginally compared to a month ago. While some steady increase in prices is a sign of a healthy economy, many of these categories are seeing inflation above than outer limit of 6% considered acceptable for overall inflation in the economy.
In case of consumer durables, the rise in prices largely stems from the sharp rise in prices of inputs, including commodities such as steel and copper, alongside an increase in the cost of other inputs like semiconductors.
The extent of input cost pressures could mean that further price hikes can’t be ruled out.
The consumer durables industry and various brands have hiked prices by about 15% or so gradually since January, said Kamal Nandi, vice president, Godrej & Boyce. “Still there is a gap of about 6% or so that is to be taken given the fact that we don’t see commodity prices easing by much even in the next quarter,” he said.
The impact is severe in products with high steel content, according to Nandi. Where plastics or polymer content is high, the impact is less severe. As such, products such refrigerators and air conditioners have been impacted more than washing machines for instance.
Wholesale inflation in base metals on an aggregate stood at 27.6% in June, the highest in the current inflation series.
The price rises are coming despite weak demand conditions.
Nandi said this is because the consumer durables industry is very competitive and operates on wafer thin margins, leaving limited room to absorb any cost increase. “We know that it’s not possible to pass on the entire commodity price hike in one go, as that would have very adverse effects on demand,” he said. So, price hikes are being done in phases.
For phones, the rise in costs is led by the semiconductor crunch.
A phone’s battery, camera, chipsets, display and memory are among its most critical parts, said Prachir Singh, senior research analyst at Counterpoint Research. All five use semiconductors in varying levels.
While several companies have already hiked prices, they are expected to rise further by about 5-8% for existing models, according to Singh. Newer models will be priced after accounting for the steady increase in cost of inputs, he added.
Prices of cars, computers and laptops have gone up because of both- prices of commodities and semi conductors.
Inflation In Perishables Remains High
Meanwhile, inflation in food and beverages remains high too, although it has eased in some categories.
While prices of vegetables and cereals fell compared to a year ago, inflation in eggs, oils and pulses remained high. Refined oil prices are 44% higher than a year ago. Prices of eggs, sugar and pulses also continued to rise.
Even though inflation has shown marginal decline, the levels are still elevated and combined with a decline in financial savings, are adding to household challenges, said a research note by Soumya Kanti Ghosh, chief economic advisor at State Bank of India.
According to Ghosh’s analysis, while spending on health expenditure may have reduced as the second wave of the pandemic recedes, expenditure on fuel may crowd out the spending on other non-discretionary items, like grocery and utility services. “In fact, the share of non discretionary spend has jumped to 75% in June 2021 from 62% in March 2021,” the note said.