Drivers of Inflation during Covid-19

Introduction:

As the Covid-19 pandemic is disrupting economies across the globe, it is very important to understand the drivers of inflation during Covid-19. Focus Economics Consensus Forecast panelists project consumer price inflation to average 5.1% in FY 2020, which ends in March 2021. In FY 2021, the panel projects consumer price inflation to average 4.3%.

Below mentioned are the drivers of inflation due to Covid-19, segmented between Lockdown phase and Re-opening phase

Lockdown Phase

The extent of price gouging in high-demand goods as panic buying and hoarding (for example, sanitizers, masks, medical supplies, pain relief medications) has played a major role in driving inflation during the lockdown phase.

Dependence on migrant workers in the production process has affected the supply. Prices of certain products (for example, agricultural goods) can increase if supply is disrupted because of labour shortages resulting from a decline in the number of migrant workers.

The extent of reliance on imported critical goods has exposed countries to inflation from abroad or to pass-through if countries witness sharp depreciations as a result of outflows driven by risk-off sentiments. This is bound to be especially important for emerging market economies and developing countries like India.

Countries failed to coordinate their emergency policies and that made international trade suffer. Also there was an assumption that supply disruptions might get worse in future. This was majorly expected in food and medical supplies industries. As exporting countries anticipated that they will not be able to import critical goods if they need, they started hoarding and avoid exporting these goods. This has contributed a lot in supply-demand.

Subsequent official lockdowns resulted in massive unemployment and income loss intensifying the fall in demand, and spreading it to other sectors as well.

Recovery Phase

Changes in consumer preferences (for example- permanent decline in demand for air travel and/or cruises) has also limited the demand rebound and dampen price increase in some sectors.

The extent of supply disruptions during the pandemic can continue scarring afterward. Impaired supply and a spike in demand can be inflationary. Containment measures may lead to mass liquidations and the destruction of economic relationships and because of that the supply side of the economy may suffer from a slow recovery (after the end of the pandemic).

Moreover, the virus is having a persistent adverse impact on labour supply, educational attainment, and other types of human capital formation. School admission, attendance and performance has gone down. While these negative impacts on the supply can create inflationary pressures, it may also lower incomes and weaken the rebound in demand. Further, an exceptionally high level of unemployment makes a strong wage push less likely. These can have a mitigating effect on inflationary pressures during the reopening phase.

An increase in the labour’s bargaining power can lead to higher wages, higher spending, and inflationary pressures during the recovery. The COVID-19 pandemic can increase labour’s bargaining power in many ways, which can affect the prices.

It is a suppliers’ market right now. There has been high demand and suppliers have increased prices in order to compensate for the loss due to lockdown. Suppliers are also mindful about fall in demand post festive season due to rise in covid cases and that is the reason they try to take advantage of the small opportunity window they get during festive season in India.

The high inflation is primarily in the areas of food, parts of fuel, communication and, to some extent, health. In October 2020, inflation, as measured by the consumer price index (CPI), stood at 7.61%. This is the highest inflation level since March 2014, when it was at 7.63%. Let’s look at this issue in all its dimensions. Other than the primary industries, there have been price hike in other industries as well.

Segment	Inflation Rate/Increase in prices	Reason
Food	9.43%	Food inflation has been on the higher side since October last year, much before covid breakout. One reason offered for inflation during lockdown and after, is a disruption in supply chains. But the economy has now more or less fully opened up, meaning disruption can’t continue to be a valid reason.
Petrol & Diesel	10.35%	Oil prices have fallen internationally. But, Government increased excise duty on them and reason for that is government’s dependence on fuel taxes has also gone up this year.
Foreign Liquor	22.32%	These increases are made by state governments to shore up revenues.
Beer	25.32%	These increases are done by state governments to shore up revenues.
Personal care & effect segment	12.07%	Of course the cost of personal care segment such as beautician services has went up by 7.04%, but even the prices of gold, silver and other ornaments have gone up. They are also categorised under this segment. It has gone up majorly because these were preferred investments in lockdown. Prices of gold, silver and other ornaments went up by 33.77%, 36.66% and 20.52%, respectively.
Steel	32%	Steel prices have increased by 32% in the past six months. Prices were the result of demand and supply. Domestic prices were impacted by International prices as well. International demand from china and other countries made the quick turnaround.
Copper	77%	There has been a rise seen in copper prices as well. There has been a high demand from China for Copper and that has what led to copper price rise. Copper prices increased nearly by 77%.
Chemical Industry	85-100%	Chemical Industry depends on raw material imports and so anti dumping duty for certain item from china led to this rise. Also some imported chemicals from China are classified as restricted, it is causing supply chain and availability constraints.
Plastic raw materials	20-300%	Plastic raw materials prices have seen a rise of 20-300% in last five months. It was the sudden surge in plastic demand post lockdown.
Aluminium	26%	Aluminium prices rise by 26%. Aluminium industry had to depend on exports during lockdown and reopening phase due to decrease in demand. But demand in ventilators let to rise in prices.
Natural rubber	52%	Natural rubber prices rise by 52% since april 1. It is a six year high. The prices are expected to rise higher. This is particularly due to China purchasing good volume. Production in thailand has decreased due to covid restrictions. And rubber trees in south-east asia have been affected by fungal disease and so the global production has gone down. Due to which the prices have doubled.
Textile Industry	7.61%	Textile Industry has been affected by increased production cost. Production cost has increased because the prices of caustic, coal and reactive dyes have gone up. This has increased the operation costs by 20%.
Propylene	26%	An unexpected rise in polypropylene prices has led in increase in prices of non-woven fabric. Non-woven fabric is used to make surgical masks and ppe kits. Some small units stopped the manufacturing as they do not have capital to procure raw material at such high prices.

What’s Next?

Recovery is faster and minor positive growth is expected in the third quarter. If efforts are not doubled to fight inflation, it can impact our economy. This can affect the government. It can also alter purchasing power and investments. If that continues for an extended period of time, it can lead an economy into recession. To stabilize and balance economy, policies can help achieve a lower rate of inflation. The government can use the monetary and fiscal policies to help control the supply of money in the economy.

Author:​

Shimoni Shah, is a fresh blood adding more knowledge to J.Hirani’s tribe. She has completed her Masters of Science in Management and Entrepreneurial Leadership from Babson College, USA. She is a trained dancer currently knowing 8 forms of dance and is adding a new form every year. She has experience of working as a technical sales executive and business-investor relationship manager.

About J.hirani: J.hirani is a Strategic Transformation team which works as a growth partner for different organisations in various industries by providing services like Agile transformation, Scenario mapping, Strategic alignment, Balance scorecard, Digital transformation, Incubating new ventures, Operation excellence and Aligning human capital.

©J.Hirani, Drivers of Inflation during Covid-19, January 2021. All rights reserved.