The high commodity cost globally, rising crude oil and domestic coal supply constraints that have spiked electricity prices may cause inflation to accelerate, which could dampen a demand recovery that is underway across sectors, economists said. A $10 per barrel increase in crude prices will add 30-40 basis points to inflation directly, while the attendant rise in lighting, transport and communication costs will also put significant price pressures.

“Higher global energy prices, including oil, present an upside risk to the inflation trajectory over the coming months. Greater pass through to pump prices – in the absence of any reduction in excise duties – electricity and other input costs could lead to a more broad-based increase in inflation,” HDFC Bank economist Sakshi Gupta said.

The bank expects a 4.4% retail inflation rate in September and 5.4% in the fiscal year through March 2022.


Higher inflation would dampen demand, and the impact would be magnified if the interest rates begin to rise in response to the price pressures.

Due to rising iron ore prices – which have just softened – and skyrocketing coking coal prices, Indian steel mills have witnessed a jump of at least Rs 9,000-10,000 a tonne in cost of production since January this year.

The steel industry is also witnessing strong demand, which is allowing the companies to pass on the higher input cost to their customers. But this raises the cost for their users, such as manufacturers of vehicles and other durable goods, pushing up the final product prices.

The Reserve Bank of India had in August raised the inflation forecast for this fiscal year to an average of 5.7% from 5.1% earlier, noting that the current trend is driven by “exogenous and largely temporary supply shocks”.

The core inflation is remaining sticky and elevated, but the overall headline still is expected to undershoot RBI’s projections in the near term, said Kotak Mahindra economist Upasna Bhardwaj. “However, the recent energy crisis emanating from oil and coal price surge poses a significant upside risk.”

High inflation in edible oil is adding to the consumer already feeling the pinch from pricier fuels. Greater spending on fuel and food items would dent discretionary consumption when the economy is opening and the services sector seeing some traction.

The government’s first advance estimates peg oilseed production to be marginally lower than last year, adding to the woes caused by the already soaring edible oil prices.

Higher cost on inputs such as of steel, copper and rhodium has led automakers to raise prices every quarter this year. While this has not dented demand, a global shortage of semiconductors is causing automakers such as Maruti Suzuki and Hyundai Motor India to limit production just ahead of the festive season. Lesser supplies, in fact, have helped sustain higher prices, but bigger spending on cars would hit consumer allocation to other goods.

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