High oil prices reduce Indians capacity to spend on health: SBI report

Mumbai: The State Bank of India's Ecowrap report has narrated the drastic situation where Indians have reached due to the frequent rise of fuel prices. It points out that every 10% rise in petrol pump prices leads to a 50-basis point increase in the Consumer Price Index while reducing consumers' capacity to spend on health.

"Our analysis of SBI card spends indicates that spend on non-discretionary health expenditure has been substantially reduced to accommodate increased expenditure on fuel. In fact, such spending has more than crowded out the spending on other non-discretionary items, like grocery and utility services to such an extent that the demand for such products has significantly declined," it said.

The share of non-discretionary spending on items like fuel has jumped to 75% in June from 62% in March 2021. CPI inflation moderated marginally to 6.26% in June from 6.30% in May. Core also moderated to 6.16%.

The headline inflation was much lower than market expectations and surprised pleasantly on the downside. Food items, especially protein items and oils and fats though, are still exhibiting an increase in prices in contrast with the global trend. The FAO Food Price Index averaged 124.6 points in June, down 2.5% from May. The decline in June marked the first drop in the index following 12 consecutive monthly increases and was brought about by the decline in prices of vegetable oils, cereals and, dairy products.

Interestingly, the decline in June inflation print reveals an across the board decline in sequential momentum. Items in the core basket having disproportionately larger weights that had exhibited a significant jump in prices in May are now back to the trend path. Surprisingly, most items in food and non-food have registered a de-growth in June, the report said.

"This raises the broader question of whether the May'21 inflation print was a data aberration given that most of the country was under the grip of a lockdown in May'21. Interestingly, this is all the more possible as core inflation in May'21 has undergone a large downward revision," it said.

Coming to the other major component fuel, the report authored by Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India, states that between May and June, the international crude prices went up by $6/bbl. The future outlook hinges on the production increases by OPEC+.

"The recently cancelled meeting of OPEC+ indicates that we are headed towards elevated levels in Brent and this will have a cascading impact on fuel inflation in India. Our calculations show that with every 10% increase in petrol pump prices (Mumbai) there is a 50 bps increase in CPI," it said.