We shall get back later to the methodology based on which the headline inflation of April and May has been imputed. For now, it is sufficient to know that the June inflation has been higher than March inflation, contrary to expectations that the absence of normal activity would have crimped demand and headline inflation.
How headline inflation for June 2020 panned out?
For the month of June, headline inflation or CPI retail inflation came in at 6.09%. Food inflation has remained relatively steady at 7.87% levels. With oil inflation remaining subdued due to steady crude prices, it can be safely assumed that even the non-core inflation would have remained at old levels. In terms of break up, the rural inflation has been higher than urban inflation. This could be explained by the fact that the lockdown impact was much lesser in the rural areas as compared to the urban areas. As a result, the income effect on CPI inflation was much more pronounced in rural India than in urban India. In fact, this gap between rural and urban inflation was more evident in food inflation, where the rural food inflation for June 2020 came in at 8.41% as compared to 6.92% for Urban India. Core inflation (ex-food and oil) was broadly steady at 4.90% in June 2020.
How the inflation for April and May were imputed?
It may be recollected that the government did not announce the inflation numbers for the months of April and May due to absence of reliable data estimates. The government’sargument was that the data points may not be reliable in the case these two months due to tepid economic activity and the shutdown in most markets. Hence the MOSPI has used an alternate method to estimate the inflation for April and May and has imputed values as shown in the chart above. Here is how the values were imputed for these two months.
For April and May, the prices of only those items were considered which were reported in 25% of the markets and where they constituted more than 70% of the sub-group weight. The estimates have been made using the common market approach at a national level instead of looking at a state-level break-up. However, the numbers for April and May are indicative and not perfectly comparable. That is because, in April only 13 out of the 23 sub-groups were considered while in May, only 15 of the 23 sub-groups were considered.
What were the drivers of June 2020 inflation?
Here are some of the highlights of June inflation as put out by MOSPI.
• Some of the components of the food basket reported June inflation in double digits. For example, Meat & Fish reported 16.22% inflation while spices reported 11.74% inflation.
• Among the other components that are normally under pressure, oils and fats showed 12.27% inflation while pulses showed inflation at an elevated level of 16.68%.
• However, inflation on Vegetables is down to 1.86% while fruits inflation is in negative. These were the key drivers of inflation between October 2019 and March 2020.
• Among the items of non-core inflation, Personal Care effects saw a sharp spike in inflation to 12.43%, largely driven by a spurt in demand for hygiene products.
Supply chain constraints could hold the answer to higher inflation
While CPI inflation in June is much lower than the levels of Dec-19 and Jan-20, it is still higher than the RBI target of 4%. This higher level of inflation despite economic inactivity can be attributed to disruption of supply chains leading to shortages in food and fuel products across key geographies. These supply chain disruptions could be attributed to extended lockdowns as well as restrictions on movement of goods and people. Even the recent embargo on Chinese imports may have sharply impacted the supply chains.
In terms of the impact on the RBI rate policy, it may not be too significant. In the last few policy statements, the RBI has made it clear that its primary focus during COVID-19 would be to propel growth to a higher level. Thus rates have been cut by 115 basis points, knowing fully well that inflation would be higher. The macro bet, perhaps, is that once economic activity resumes and supply chains are restored, inflation should automatically taper to more manageable levels.