EXPRESS ILLUSTRATION
EXPRESS ILLUSTRATION

Double trouble of stagflation looms large

However, with the pandemic rearing its head again and our vaccination drive faltering, stagflation is indeed a real threat.

Monday opened with double trouble. Data released by the Ministry of Statistics & Programme Implementation showed that retail inflation, measured by the Consumer Price Index (CPI), advanced to 5.52% for March from 5.03% in February. Simultaneously, factory output, reflected in the Index of Industrial Production (IIP), contracted by 3.6% for February compared to a year ago, falling to 129.4. This is a big fall considering IIP had grown 5.2% in the corresponding month of February 2020. For the 11 months of FY2021, the industrial sector has contracted 11.3%, as compared to the marginal growth of 1% registered for the corresponding period of FY2020.

This no doubt can be attributed to the trail of destruction the pandemic has left on economic growth. However, with factory output continuing to decline even in February, the turnaround predicted is either very weak, or is yet to materialise. It is the food basket that has been mainly driving retail inflation. Prices of oils and fats rose a gargantuan 24.9%, meat and fish were up 15.09%, and pulses rose 13.25% in March. Besides food, inflation in transport and communication too was at 12.55% compared with 11.36% in February.

Though inflation is within the RBI’s target range of 2-6%, March’s 5.52% is the highest level reached in the last four months, and does not bode well for the pockets of the poor. In normal circumstances, when there is rising employment and increasing consumption, there is an inflationary push, often referred to as the Phillips curve. What is worrisome though is the declining factory output shows a slowing down of the post-pandemic recovery and the possible rise in unemployment.

It is the dangerous cocktail of ‘stagflation’ that we now seem to be confronting—wherein the hardship of lack of growth and joblessness is combined with increasing prices and cost of living. The nascent recovery, it was believed, would be fuelled by a successful vaccination drive and new investment activity. However, with the pandemic rearing its head again and our vaccination drive faltering, stagflation is indeed a real threat.

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