For the month of Aug-21, CPI inflation at 5.30% was almost 70-80 bps lower than consensus estimates. It is hard to say whether the consensus was too conservative, but it was way off target. Helped by lower food prices and a favourable base effect, inflation touched a 4-month low of 5.30%. This is still higher than the RBI inflation target of 4% but well within the upper tolerance limit of 6%. The 29 bps fall in retail inflation over Jul-21 from 5.59% to 5.30%, was driven by a sharp fall in food inflation from 3.96% to 3.11%.
Food inflation in Aug-21 fell further by 85 bps from 3.96% to 3.11%. This comes on top of a 115 bps fall in food inflation in the previous month. However, the one area of concern is that sticky fuel and transport inflation continues to have a secondary impact on all goods and services. For example, fuel inflation continues to be very high at 12.95% while transport inflation is also high at 10.24%. Both have very strong externalities.
Rural food inflation tapers further in Aug-21
In June there was the anomalous trend of food inflation and headline inflation rising in rural India but tapering in urban India. That changed in July with both rural and urban inflation trending lower. In Aug-21, that trend got accentuated and rural food inflation is now decisively lower than urban food inflation.
Headline rural inflation tapered further from 5.49% to 5.28% while rural food inflation fell sharply from 3.55% to 3.08%. The cumulative fall in the last 2 months has been quite decisive compared to near 10% rural food inflation in August last year.
Urban food inflation tapered from 4.56% to 3.28% while the headline urban inflation also eased from 5.82% to 5.32%. Despite the 25% monsoon shortfall in August, the inflation impact has been minimal.
If you break up rural food inflation, it is most pronounced in protein diets like eggs at 18.19%, oils & fats at 35.90% and meat & fish at 10.06%. Core inflation items like clothing and footwear remained higher in rural areas than urban areas, although fuel and transport inflation are lower in rural areas.
Core inflation tapers further to 5.89% in Aug-21
Since the core inflation peaked at 6.40% in May-21, it has progressively inched lower to 6.16% in Jun-21, 5.97% in Jul-21 and to 5.89% in Aug-21. While base effect is helping core inflation, risk of downstream effects of high fuel and transport inflation is still real.
For the RBI to be able to maintain core inflation at around 4%, the transport and fuel inflation needs to come down sharply as they have a strong cascading effect on other commodities.
Higher MSP brings record food flows to the market
The overall Kharif output this year may be impacted by weak monsoons. In Aug-21, the monsoons were 24% below the LPA. However, the attractive MSPs offered by the government led to record flow of food to the mandis and helped taper prices.
Let us quickly look at what helped food inflation taper from 3.96% to 3.11% in Aug-21.
• Meat and fish inflation spurted to 9.19% in Aug-21 compared to 8.33% in Jul-21 and 4.83% in Jun-21. Egg Inflation in Aug-21 was lower at 16.33% compared to 20.82% in Jul-21 and 19.35% in Jun-21. However, absolute inflation is still high.
• Fruits inflation tapered to 6.69% in Aug-21 compared to 8.91% in Jul-21 and 11.82% in Jun-21. Vegetable inflation dipped further to (-11.68%) compared to (-10.58%) in Jul-21 and (-0.70%) in Jun-21. Clearly, vegetable inflation has driven food inflation lower.
• Pulses inflation moderated to 8.81% in Aug-21 compared to 9.04% in Jul-21 and 10.01% in Jun-21. Cereals inflation stayed in negative at (-1.42%) compared to (-1.75%) in Jul-21 and (-1.94%) in Jun-21. Sugar inflation dipped further to negative at (-0.60%).
While most food inflation items tapered, negative vegetable inflation sharpened the fall.
RBI can breathe a sigh of relief, but oil remains the worry
For now, RBI can heave a sigh of relief. Retail inflation is at a 4-month low and core inflation is well under 6%. The August monetary policy held its accommodative stance but raised annual inflation target to 5.7%. If this falling trend continues, full-year inflation can undershoot 5.7%. With the Fed not hiking rates for now, RBI has reasons to hold its stance.
However, the bigger concern for the government is the price of crude oil. After a brief lull, the Brent crude prices are back to a multi-month high of $73.92/bbl. That indicates little respite for fuel inflation and transport inflation. Even in the midst of tapering headline inflation, fuel inflation has touched a high of 13% in August. It is time for the government to look at an excise duty cut on oil. After all, losing revenues is a better choice than letting inflation having an unbridled run. That is the challenge for 2021!