Skewflation

Skewflation is an economic term used to describe a situation in which prices of certain goods or sectors rise sharply while the prices of others remain stable or even decline. Unlike general inflation, which indicates a broad-based increase in the overall price level across the economy, skewflation refers to uneven or sector-specific inflation, where the rise in prices is “skewed” towards particular commodities or industries.
The term is derived from the word “skewed”, meaning unequal or unbalanced, combined with “inflation”, denoting a rise in prices. Skewflation often reflects structural imbalances, supply-side bottlenecks, or sectoral demand pressures rather than a uniform monetary phenomenon.

Meaning and Concept

In simple terms, skewflation occurs when prices of some goods—often food items or essential commodities—increase significantly, while others remain stable. As a result, the average inflation rate may not fully reflect the hardship faced by consumers, since specific items in everyday use become disproportionately expensive.
For instance, during certain years in India, the prices of vegetables, fruits, or pulses surged steeply while prices of manufactured goods or services changed only marginally. This unequal rise created a situation of skewflation.

Difference Between Inflation, Deflation, and Skewflation

Thus, skewflation lies between inflation and stability—it reflects distortion rather than a uniform economic trend.

Causes of Skewflation

Several structural and temporary factors can lead to skewflation in an economy:

1. Supply-side Constraints:
   • Shortages due to poor monsoon, crop failure, or logistical disruptions can drive up food prices.
   • Limited storage and distribution facilities amplify price fluctuations in perishables.
2. Sectoral Demand Shifts:
   • Rapid increase in demand for certain commodities (e.g., crude oil or food grains) may not be matched by corresponding supply.
   • Rising incomes in urban areas can increase demand for protein-rich foods, leading to “protein inflation.”
3. Global Commodity Price Volatility:
   • Increases in international oil, gas, or fertiliser prices can push up domestic input costs in specific sectors.
4. Structural Bottlenecks:
   • Inadequate infrastructure, high transportation costs, and inefficient market linkages cause uneven price transmission.
5. Policy and Regulatory Factors:
   • Minimum Support Prices (MSPs) or subsidies in selected sectors can distort relative price levels.
   • Import restrictions or export bans on key commodities alter domestic supply-demand balances.
6. Seasonal and Climatic Factors:
   • Seasonal crops such as onions, tomatoes, and pulses often exhibit sharp price spikes due to weather variations.
7. Energy and Fuel Costs:
   • Increases in fuel prices raise transportation and input costs disproportionately, affecting certain industries more than others.

Skewflation in the Indian Context

In India, skewflation has frequently been observed, particularly in the food and agricultural sectors. For example:

• During the 2009–2012 period, India experienced high food inflation—especially in vegetables, pulses, and milk—while the prices of manufactured goods and services remained relatively stable.
• The rise in fuel and energy prices further skewed overall inflation, as transportation and logistics became costlier, indirectly raising food prices.
• The term “skewflation” was popularised by economists during this period to describe this uneven price behaviour in the economy.

The phenomenon illustrated that headline inflation (CPI or WPI) could sometimes underestimate the distress caused by rising food prices, which affect lower-income households more severely.

Impacts of Skewflation

1. Distorted Inflation Measurement:
   • Standard inflation indices may not reflect true consumer hardship if price increases are concentrated in essential items.
2. Reduced Real Income:
   • When food prices rise disproportionately, households—especially poorer sections—spend a larger share of income on necessities, reducing savings and spending on other goods.
3. Unequal Sectoral Profits:
   • Producers in high-inflation sectors may benefit temporarily, while those in stagnant sectors suffer from low demand.
4. Policy Dilemmas:
   • Monetary policy, aimed at controlling overall inflation, may be ineffective if skewflation arises from supply-side issues.
   • Raising interest rates in such cases could slow growth without addressing the real cause of price hikes.
5. Social and Political Consequences:
   • Sharp increases in food or fuel prices can lead to public unrest, wage demands, and political challenges.

Policy Measures to Control Skewflation

Since skewflation is mainly a sectoral and structural issue, the response requires targeted supply-side interventions rather than broad monetary tightening. Key policy measures include:

1. Improving Agricultural Productivity:
   • Investment in irrigation, storage, and cold-chain infrastructure can stabilise food supply.
   • Promoting crop diversification and better logistics reduces volatility.
2. Market Reforms:
   • Strengthening market linkages and reducing intermediaries ensure fair price transmission between producers and consumers.
3. Rationalising Subsidies and Support Prices:
   • Balanced agricultural pricing policies prevent excessive focus on certain crops while neglecting others.
4. Encouraging Imports During Shortages:
   • Timely imports of food items can help stabilise prices during domestic supply shocks.
5. Energy and Transport Efficiency:
   • Controlling fuel price volatility and improving transport systems reduce input costs across sectors.
6. Effective Inflation Monitoring:
   • Use of disaggregated data and core inflation analysis helps policymakers detect skewed price trends early.

Comparison with Stagflation

Skewflation is often confused with stagflation, but they are conceptually different: