Another way to look at inflation is via the rural / urban inflation divide. IIP growth and corporate results have indicated that a lot of the growth traction in the last few months has come from rural Indiarather than from urban India. That trend is evident in the month of November also. Despite the rural and urban inflation falling in Nov-20 over Oct-20, the rural inflation continues to be relatively elevated. Consider the numbers. Overall urban inflation has fallen from 7.33% to 6.73% (Nov over Oct); while rural inflation has only fallen from 7.75% to 7.20%. A similar trend is visible in food inflation also; where the rural inflation is higher than urban inflation. In a nutshell, higher purchasing power in rural areas due to a bumper Kharif harvestand higher income levels is triggering demand driven rural inflation.
Food inflation is encouraging but core inflation is a bigger worry
Core inflation for the month of November has touched a multi-year high of 5.79%. In fact, if you look at the comparative chart of food inflation and core inflation, it is core inflation that appears to be on a one-way upward journey. The Kharif has had a sobering impact on food inflation but there is no such optimism in case of core inflation.
Core inflation is the non-food, non-oil inflation. In short it is the residual inflation in the CPI basket. It is tracked closely because core inflation is stickier and does not come down with the cycles. That is evident in the core inflation chart above. Secondly, core inflation is indicative of larger fundamental challenges like supply chain constraints. Core inflation has gained 230 bps in the last one year. From a policy perspective, it is important because unless core inflation comes back to below 4%, it is going to be very tough to rein in CPI inflation.
While we shall look at food inflation along with its components in detail, the sharp fall in food inflation in Nov-20 has been useful in bringing down CPI inflation. If you look at the food inflation chart, it is down from the peak levels of 14.12% in Dec-19. However, 9.43% food inflation is still relatively high, especially considering that this comes in the backdrop of record Kharif and Rabi harvest.
The story of food inflation basket in Nov-20
While there has been a good Kharif output, it is not clear how the Rabi output is likely to be considering that most farmers from Punjab and Haryana are protesting on the outskirts of Delhi. The new Farm Bills 2020 passed by the government have become controversial due to its potential to shake up the existing system and also bringing in more corporatization of agriculture. Here are the specific food items that contributed to sobering of food inflation.
• Meat and fish inflation was 200 bps loweron a sequential basis at 16.67%. Unfortunately egg Inflation has doubled in one quarter from 10.11% in Aug-20 to 20.26% in Nov-20. However, egg inflation is marginally lower than Oct-20.
• Fruit inflation continues to taper and in Nov-20 it has trended lower to 0.27%. The good news is that vegetable inflation has fallen sharply from 22.51% in Oct-20 to 15.63% in Nov-20. Clearly, government measures appear to be working.
• Pulses inflation has tapered to 17.91% in Nov-20 from 18.34% in Oct-20. However, that is still high, being the only popular source of proteins. However, cereals inflation has tapered further from 3.39% in Oct-20 to just 2.32% in Nov-20.
• The glut in sugar supply has brought down sugar inflation further to just 0.88% compared to 1.40% last month. However, Spices inflation continues to be elevated at 10.68%.Transport inflation is a worry at 11.06%; akin to last month.
Has it reaffirmed the RBI accommodative stance?
In a way, lower inflation has given more room to the MPC to keep an accommodative stance for longer even if rate cuts are not feasible at this point. The Oct-20 Monetary Policy and the Dec-20 policy made a brave effort to give longer term guidance of accommodative monetary stance. For that to be possible, inflation has to trend lower quickly.For the time being, it does look like monetary accommodation is here to stay!