Distortions in relative prices, cutback in discretionary spending unaccounted for in calculation
The CPI inflation has slowed down to 4.29 per cent in April, from 5.52 per cent in March. But headline inflation may not be the correct indicator to look at, said State Bank of India in the latest edition of its research update “Ecowrap”. It added that actual inflation for the five-month period ending April 2021, may be higher than the CSO estimate by 60 basis points on average.
The bank, in its research report, said a more important price concept is relative prices, which are not a monetary phenomenon but their movements convey important information about scarcity of particular goods and services, like healthcare these days.
“For example, overall CPI declined in April because of significant decline in food CPI, but when relative prices of food items is compared to overall CPI, the deceleration was not as sharp as in actual food CPI. Similarly, for items like fuel and health, the increase in relative prices is maximum. Interestingly, the core CPI, which was showing a decline of 57 basis points, increased in relative terms by 18 points,” it said.
The report added: “Such distortions in relative prices” must be looked through now, as it could have an impact on ratcheting up future inflationary expectations.
Drawing three conclusions from this distortion, SBI said health expenditure — currently at 5 per cent of overall private final consumption expenditure — could increase by at least 11 per cent from the current level. “This is likely to squeeze expenditure on other items of discretionary consumption, a recipe for a cutback in consumption spending,” it said.
Second, the increase in fuel prices since December, even as the government faces a collapse in revenue receipts, is having a direct impact on squeeze in consumption spending on discretionary items, other than on health which is currently unavoidable, it added.
“But the most definitive conclusion when we re-estimated CPI headline by using SBI card spend data and through Paasche’s Index, since December 2020, is that our CPI computed inflation for the five-month period that ended in April 2021, is higher than the CSO estimate by 60 basis points on average. This has happened as spend on oil in December has crowded out the spending on other discretionary items, like health, grocery and utility services, which was the trend in earlier months, and this is worrisome. In fact, the share of non-discretionary spend has jumped to 59 per cent in April 2021 from 52 per cent in March,” it explained.
“This demands a cut in oil prices through tax rationalisation, otherwise consumers’ non-discretionary spending will continue to get distorted and crowd out discretionary expenses. This will also impart a clear upward bias in inflation. Furthermore, there has been an increase in use of online delivery platforms, which is not considered by NSO. If NSO considers online prices, there would be 10/15 bps impact on CPI inflation,” it added.