War-driven price escalation

This time the price rise of essentials and non-essentials will show no mercy
War-driven price escalation
"One of the major concerns which erupted immediately after the Russia-Ukraine war has been the rise in the price of crude which is now above $100 a barrel."Screengrab

Even as rising prices of essential as well as non-essential commodities is not a new phenomenon, the outbreak of war between Russia and Ukraine is all set to trigger further price hike of consumer products.

The experts having a close eye on the economic aspect of the war have not ruled out further escalation in consumer inflation. This is going to derail the economic recovery efforts after the virus-induced pandemic devastated every sector of the economy in the last two years.

One of the major concerns which erupted immediately after the Russia-Ukraine war has been the rise in the price of crude which is now above $100 a barrel. The pricing of consumer products are revised upwards immediately after the fuel prices observe upward swing.

Notably, as per reports India imports nearly 80 percent of its oil needs and the rise in the price of crude bears the dangers of pushing the country towards a risk of high inflation.

A Reserve Bank of India (RBI) analysis reveals that inflation figures witness 0.5% rise after every $10 rise in crude prices. This oil price hike is definitely going to impact the prices of essentials including food items

Economists having a close eye on the emerging geo-political scenario in the ongoing Russia - Ukraine conflict have warned that increasing prices of crude oil and other commodities will have a cascading impact on raw materials and packing materials.

Even as manufacturers and other companies will have to absorb the rising input costs of their production, it’s not ruled out that a substantial portion of price escalation in production cost will be passed on to the consumers. In other words, the brunt of rising prices as usual falls on the consumers.

As the Russia-Ukraine war immediately impacted crude prices, experts as quoted by a financial daily (Financial Express) are opining that the daily adjustment model of pricing fuel will make sure that consumers prices for fuel shoot up madly.

Expect anything between 12-20 per cent, in a worst case scenario. This means that every consumer pays more to travel, for every cake of soap, toothpaste and vegetable and fruit, etc. Expect consumer prices of goods and services to rise and expect the bite to be deep. This is really imported inflation due to war.

In the backdrop of the ongoing Russia - Ukraine war, the Indian corporate sector has already revealed intentions of taking another round of calibrated price increase of their products and commodities. For instance, a Financial Express report quoting CEO, Dabur India Ltd, states that Dabur too is looking at a ‘calibrated price increase’ in case of a rise in input cost.

“We are closely watching the situation now, and will have to take another round of calibrated price increases in case the inflationary pressures continue unabated,” CEO, Dabur India Ltd, said. There is already continued inflation in hydrocarbon derivatives, paper-based packing material, raw honey, edible oils and some key spices that Dabur uses.

To be precise, it’s ‘imported inflation’ that is going to hit common consumers hard and there will be no relief from the rising inflation in the coming quarters. Rising prices of raw material and other input costs are inevitable on a long term basis and there would be no alternative for the consumers but to shell out more for less for varied products and commodities.

So what is at the moment a major threat to food security? The pandemic has already created complicated economic uncertainties. On the one hand, millions of households have been rendered struggling for want of finances as their earning hands have either lost jobs or have faced drastic cuts in their salaries/incomes.

On the other hand, prices of essential commodities, especially the food items, have gone up considerably, making it difficult for the affected households to have sufficient quantity and quality of food for their consumption. The last two years of the pandemic have been most miserable for them.

Now another inevitable situation has emerged due to the war between Russia and Ukraine and is going to add more to the high food price inflation at the retail level. This will leave a huge impact on the low and middle income segment of the population as they spend a major portion of their income on food.

Notably, food security has emerged as a critical issue. We all know access to healthy food and optimal nutrition for all is at the core of food security. Or we can say food security is dependent on a healthy and sustainable food system. When we talk of the food system, it is food availability, food accessibility and food affordability that constitute the pillars of food security.

However, a lot of imbalances are visible in our food system as people have been facing difficulty to have physical and economic access to adequate amounts of nutritious, safe, and culturally appropriate foods. Shortage of food has even hit the people who carve out living by producing food.

To be precise, food insecurity is going to be one of the biggest challenges to confront in the coming times as the kind of economic upheaval first triggered by the virus and now by the ongoing war is not going to end in the next two to three years.

Meanwhile, the COVID-19 infection brought innumerable socio-economic miseries to the people. Millions of people were rendered jobless for periods much longer than they expected and many saw drastic cuts in their income resources. In both cases, households lost revenue and this also adversely impacted the financial health of those in the households who were dependent on them. The war-driven push in the prices of consumer goods is going to complicate the situation for the households.

Loss of income has a direct impact on the assets of households and over a period of time they helplessly start losing the assets to fund their daily household needs. During the two years of the ongoing pandemic, households have been eating into their savings to keep their household budgets afloat.

The financial health of households not only holds sway for its members, but it has direct bearing on the economic recovery process. A dip in household savings impairs their spending capability, thereby causing a dent in their future consumption. This all leads to jeopardising the overall economic recovery efforts.

Notably, the pandemic has already placed some important financial lessons and the emerging war driven situation prioritizes money management skills as an arsenal to stay afloat in difficult times.

Here, the most basic and essential step during difficult times is to have a budget. Basically budgeting lies at the foundation of every financial plan. It’s about understanding how much money you have, where it goes, and then simultaneously planning how to best allocate those funds to realize different goals. Creating a budget always looks just a tedious financial exercise, that too when you feel your finances are already in proper order.

But you might be surprised at just how valuable a budget can be. A budget helps you to keep your spending on track. Don’t be surprised to see some hidden cash flow problems uncovered that might free up even more money to put toward your other financial goals.

To conclude, the price rise of essential and non essential commodities is inevitable and this time it is long lasting amid the ongoing war. So the consumers have to be ready for the impact, which will be adverse in nature. They need to readjust to their spending habits to negotiate rising prices.

(The views are of the author & not the Institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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