New Delhi, Aug 19: Inflation in global goods and commodities is likely to feed into India’s consumer prices with a lag, although the transmission is expected to be limited and partly absorbed through margins, according to Axis Bank Research.
The bank’s latest analysis estimates that 18 per cent of a shock in wholesale price index (WPI) import inflation transmits to consumer price index (CPI) import inflation within four months.
The analysis, titled Anatomy of Inflation Transmission, examined previous commodity-price shocks, including the 2018 oil price jump following OPEC+ cuts, stronger Chinese refinery activity and the US withdrawal from the JCPOA, as well as the 2022 wheat, fertiliser and energy shock following the Russia-Ukraine war.
Imported prices account for 34 per cent of the WPI basket and 26 per cent of the CPI basket, making global commodity movements an important channel for domestic inflation.
Axis Bank Research said its model, based on seasonally adjusted monthly changes and a VAR framework, found that transmission builds gradually over several months.
The report said the initial shock from May may have been largely transmitted, but fresh price shocks could create upside risks to inflation in the months ahead.
Actual transmission can also be less smooth than the modelled path, according to the analysis.
The report’s second-page charts point to potential pressure from higher product prices affecting airfares and hospitality in August. It also highlights lower petroproduct inventories, with crude oil inventories around 5 billion barrels, as another factor that could keep price pressures elevated.
The analysis shows that global trade inflation has historically fed into imported WPI inflation, which then transmits to imported CPI inflation with a lag.
However, the pass-through is not one-to-one as businesses can absorb part of the initial commodity shock through margins.
Axis Bank Research’s findings suggest that while the initial commodity-price shock may have largely worked through the inflation pipeline, renewed increases in global goods and energy prices could put pressure on India’s consumer inflation trajectory. (BVI)
