After falling way short of the actual inflation in May-21, the consensus estimates for Jun-21 ended up being a tad too hawkish. The consensus pegged inflation closer to 6.9%, but Jun-21 headline inflation came in lower at 6.26% compared to 6.30% in May-21. Core inflation was lower than May but that was largely offset by a sharp spike in food inflation.
Food inflation in Jun-21 spiked further from 5.01% to 5.15% on top of the 305 bps spike in May. The more worrying aspect is that fuel inflation shot up further from 11.58% to 12.68% while transport inflation spiked to 11.56%. Clearly, petrol and diesel scaling above Rs100 per litre left a deep impact on the prices of downstream products.
Data Source: MOSPI
Jun-21 sees a sharp spike in rural inflation
In the month of Jun-21, food inflation and headline inflation diverged for rural and urban consumers. Let us look at headline inflation first. Headline rural inflation tapered from 6.55% to 6.16% while rural food inflation actually spiked from 4.52% to 5.02%. The opposite trend was visible in urban inflation. In Urban India, food inflation tapered from 5.97% to 5.42% while the headline urban inflation actually spiked 5.91% to 6.37%. In short, rural India is bearing the brunt of higher food inflation while urban India is bearing the brunt of fuel and core inflation. That appears to be the message coming from Jun-21 price data.
If you break up rural food inflation, it is most pronounced in eggs at 20.01%, oils and fats at 37.77%, fruits at 10.75%, non-alcoholic beverages at 16.47%. While transport inflation is relatively muted in rural India, fuel inflation is hitting rural India quite hard.
Core inflation tapers to 6.19% in Jun-21
The chart captures a comparison of food inflation and core inflation over last 1 year. In Jun-21, there has been a divergent trend. For example, core inflation tapered from 6.55% to 6.19% but that was more than offset by food inflation spiking from 5.01% to 5.15% in Jun-21. As a result, for the second month in succession, headline inflation stayed above the RBI comfort zone outer limit of 6%.
Core inflation will have to be the focus as it is quite steep at 6.19%. However, the bigger worry for the inflation number is the dual micro-items of fuel inflation and transport inflation. Both these items have strong externalities, in the sense that the spike in these two items can have strong downstream effects. It looks like the government does need a drastic rethink of its fuel pricing policy as it really cannot afford fuel-driven inflation now.
Delayed monsoons makes food prices dearer
Regarding monsoons, the euphoria of June appears to have been replaced by the scepticism of July. Monsoon may have arrived on time, but even IMD admits that progress has been tardy. That is taking its toll on food prices, which is evident in the sharp spike in food inflation in Jun-21.
• Meat and fish inflation in Jun-21 tapered further to 4.83% compared to 9.03% in May-21 and 16.68% in Apr-21. Egg Inflation was up sharply at 19.35% in Jun-21.
• Fruits inflation was flat at 11.82% in Jun-21 compared to 11.98% in May-21 and 9.81% in Apr-21. Vegetable inflation flattened to (-0.70%) in Jun-21 compared to (-1.92%) in May-21 and a much lower (-14.18%) in Apr-21.
• Pulses inflation sharpened to 10.01% in Jun-21 compared to 9.39% in May-21 and 7.51% in Apr-21, but still lower than the 3-month average. Cereals inflation stayed in negative at (-1.94%). Sugar inflation jumped back into positive at 0.79% in Jun-21 compared to (-1.37%) in May-21 and (-5.99%) in Apr-21.
Government must be cautious about downstream effect
Retail inflation in Jun-21 was again above the outer limit of the RBI comfort zone of 6%. Remember, 6% is the worst case inflation tolerable to the RBI while it targets median inflation of 4%. While the spike in inflation in last two months can be partially attributed to the base effect, it must be admitted that fuel and transport inflation played a big role in triggering downstream inflation across products and services.
We had specifically highlighted last month that fuel inflation at 11.58% was just not sustainable. In Jun-21, this fuel inflation spiked by another 110 bps to 12.68%. In addition, you also see a sharp spike in transport inflation at 11.56%. Fuel inflation and transport inflation have a strong downstream effect and that is likely to put pressure on core inflation and food inflation, even after the base effect tapers.
The message for the government is that it has to think out of the box in finding a solution to daily fuel price hikes. Budget constraints are fine but there is a point beyond which the Indian economy can ill afford fuel price hikes. With the global crude oil situation getting grimmer and the OPEC members at loggerheads, India needs a smarter answer to fuel inflation.