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CPI Inflation tapers to 7.01%, below street expectations

  • India Infoline News Service
  • 13 Jul , 2022
  • 11:49 AM
It is marginally lower by 3 bps compared to May 2022, but the full impact of lower prices of oil, minerals and food products is not yet fully factored in. Despite best efforts, the overall inflation continues to remain above 7% for the third month in a row. It is the sixth consecutive month that inflation has been above the outer RBI tolerance level of 6%.

Interestingly, June 2022 also marks the 33rd successive month that retail inflation stayed above the RBI median target of 4%. While food inflation tapered marginally, core inflation almost remained flat at 6.11%. Thanks to the RBI tightening measures, the consumer inflation has fallen in the last 2 months from a high of 7.79% in April 2022 to 7.01% in June.



Data Source: MOSPI

In May 2022, we witnessed the first signs of food inflation tapering from 8.38% to 7.97%. In June 2022, food inflation tapered further to 7.75%. This indicates that food inflation is topping out in the near-term and the Kharif arrival in the market could further temper food inflation. However, the tapering of food inflation in the last two months must be seen in the context of the surge over the 6 months prior to that. Between April and June, Food inflation tapered by 63 bps. However, this comes after a 670 bps spike in the six months prior to that. Tepid Rabi arrivals did not help food prices this year.

In June 2022, fuel inflation has again spiked to 10.39% compared to 9.54% in May 2022. However, transport inflation has sharply fallen from 9.5% to 6.9% in June 2022.

Rural food inflation tapered further in June 2022

There has been a mixed trend on the inflation front in rural India. On a MOM basis, the rural food inflation tapered from 7.76% to 7.61%. However, the overall rural inflation has gone up marginally from 7.08% to 7.09%, indicating that non-food items are putting pressure on rural inflation.

It looks like Rural India is facing the impact of non-food inflation much more than food inflation. Supply chain constraints are still exerting pressure on inflation in rural areas and that has led to a spike in rural core inflation with most of the lifestyle products seeing a sharp spike in inflation in rural areas.

In terms of the rural food basket, inflation in oils & fats fell sharply from 13.83% to 9.30% while spices inflation spiked from 9.96% to 11.12%. Vegetable inflation spiked to 15.69% in June 2022. High protein foods like eggs and milk saw a sharp fall in rural inflation basket with egg inflation dipping into the negative. In the rural basket, fuel bounced from 8.41% to 9.25%, clothing & Footwear from 8.81% to 9.60% and personal care effects from 5.78% to 6.34%. In short, rural food inflation tapered, but other items ended higher.

Core inflation almost flat at 6.11% in June 2022

May 2022 marked the 8th successive month that core inflation stayed above 6%. However, core inflation at 6.11% is sharply lower than 7.24% in April 2022. In a sense, the key drivers of core inflation like crude and minerals have fallen in the last one month, but the trickle-down effect will take some more time to manifest in core inflation. The structural nature of core inflation makes it tougher to manage and regulate.

Month Food Inflation (%) Core Inflation (%)
Jun-21 5.15% 6.11%
Jul-21 3.96% 5.93%
Aug-21 3.11% 5.77%
Sep-21 0.68% 5.76%
Oct-21 0.85% 6.06%
Nov-21 1.87% 6.08%
Dec-21 4.05% 6.02%
Jan-22 5.43% 6.21%
Feb-22 5.85% 6.22%
Mar-22 7.68% 6.53%
Apr-22 8.38% 7.24%
May-22 7.97% 6.09%
Jun-22 7.75% 6.11%
Data Source: MOSPI / Bloomberg

There is also a policy perspective to core inflation. Controlling core inflation has to necessarily be a trade-off between government revenues and the larger goal of inflation control. That is the dilemma that the government finds itself in. The battle against inflation is having a fiscal cost in the form of duty cuts resulting in lower revenues.

Here is the food basket story for June 2022

Here are some of the major highlights of the food basket story in June 2022

·         Meat and fish inflation was up at 8.61% in June 2022 compared to 8.23% in May 2022 and 6.97% in April 2022. Egg Inflation dipped deeper into negative at -5.48% in June 2022 compared to -4.64% in May 2022 and 0.00% in April 2022.


·         Fruits inflation bounced back to 3.10% in June 2022 compared to 2.33% in May 2022 and 4.99% in April 2022. Vegetable inflation remained problematic at 17.37% in June 2022 compared to 18.26% in May 2022 and 15.41% in April 2022. Considering its 13.2% weightage in the food basket, vegetables are a major inflation trigger.


·         Pulses inflation dipped deeper into negative at -1.02% for June 2022 compared to -0.42% in May 2022 and 1.86% in April 2022.

Cereals inflation was at 5.33% in June 2022 almost at par with May 2022. Sugar inflation was lower at 4.17% in June 2022 compared to 4.27% in May 2022 and 5.22% in April 2022.

While rural food inflation moderated in June, urban food inflation continued to remain elevated on the back of a spike in vegetables inflation.

Message from RBI; Get prepared for another rate hike

The RBI surprised the street with an unscheduled MPC meet in May 2022, hiking the repo rates by 40 bps and CRR by 50 bps. This was followed by another 50 bps rate hike in the June 2022 MPC meeting. With 90 bps of rate hikes done, the RBI only needs to hike rates by 20 bps to restore interest rates to pre-pandemic levels. The tightening has brought down inflation. The question is what about the August 2022 monetary policy?

For now it looks like another 35-50 bps rate hike may be on the cards in the August policy. RBI may prefer to err on the side of caution and hike repo rates above the pre-pandemic rates. That would give them more policy leeway in the future. But it cannot be a decision in isolation. A lot will depend on how the June consumer inflation in the US pans out. If the US inflation is still above 8% and the India WPI inflation is above 15%, then rest assured that this is not yet the end of the rate hike cycle. There is surely more to come!
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RBI hawkishness works as CPI Inflation tapers to 6.71% for July

  • India Infoline News Service
  • 15 Aug , 2022
  • 11:24 AM
This is the third successive month inflation tapered and now the headline inflation is down 108 bps from the April peak. Economists expect the CPI inflation to stay around these levels for next two months due to lower than expected Kharif output. Despite the fall in headline inflation, July marks the seventh consecutive month that inflation has been above the outer RBI tolerance level of 6%.

July 2022 also marks the 34th successive month that retail inflation stayed above the RBI median target of 4%. Remember, 6% is the outer tolerance limit while the target median inflation in India is 4% as per RBI estimates. Food inflation tapered sharply by 100 bps from 7.75% to 6.75%, but core inflation once again crossed the 6% mark in July 2022. The RBI tightening measures, which began in May 2022, appears to be delivering the results.



Data Source: MOSPI

May 2022 showed the first signs of food inflation tapering from 8.38% to 7.97%. In June 2022, food inflation fell to 7.75% and by another 100 bps to 6.75% in July 2022. Effectively, food inflation is down 163 bps since May. While food inflation has fallen, one concern is that the Kharif acreage has been lower this year compared to previous year and that could impact sentiments and the agricultural supply chain.

However, we must put inflation in context. In the six months prior to May 2022, food inflation spiked by 670 bps so the spike is still only partially undone. In July  2022, fuel inflation accelerated to 11.76% but transport inflation tapered to 5.5%, falling nearly 400 bps in last 2 months.

Rural inflation continues to be higher than urban inflation

There has been a mixed trend on the inflation front in rural India. On a MOM basis, the rural food inflation tapered from 7.61% to 6.80%. However, the overall rural inflation has fallen much less from 7.09% to 6.80%, so non-food items are putting pressure on rural inflation. Rural India is facing the impact of non-food inflation much more than food inflation. Supply chain constraints are still exerting pressure on inflation in rural areas and that has led to rural non-food inflation falling much less than food inflation.

In terms of the rural food basket, inflation in oils & fats fell sharply from 9.30% to 7.15% while spices inflation spiked from 11.12% to 13.02%.
Vegetable inflation tapered from 15.69% to 10.34%, but still high in absolute terms. Rural inflation in high protein foods like eggs and milk have tapered with egg inflation dipping into the negative. In the rural basket, fuel bounced from 9.25% to 10.52%, clothing & Footwear from 9.60% to 9.98% and personal care effects at 5.80%. In short, rural food inflation tapered, but other items ended higher.

Core inflation is back above 6% in July 2022

In June 2022, core inflation had fallen marginally below 6% mark but in July 2022, it has bounced back above 6% as supply chain constraints are hitting costs. However, core inflation at 6.01% is sharply lower than 6.97% in April 2022. While core inflation refers to the basket excluding food and fuel, the price of petrol and diesel has a strong impact on core inflation due to strong externalities of fuel.

The structural nature of core inflation makes it tougher to manage and regulate. The last Economic Survey ahead of the Union Budget 2022 clearly underlined the need to focus on core inflation more than headline inflation. Core inflation around 4% should be ideal, but that looks some time away and it remains to be seen if the RBI hawkishness can help.

Month Food Inflation (%) Core Inflation (%)
Jul-21 3.96% 5.93%
Aug-21 3.11% 5.77%
Sep-21 0.68% 5.76%
Oct-21 0.85% 6.06%
Nov-21 1.87% 6.08%
Dec-21 4.05% 6.01%
Jan-22 5.43% 5.95%
Feb-22 5.85% 5.99%
Mar-22 7.68% 6.32%
Apr-22 8.38% 6.97%
May-22 7.97% 6.08%
Jun-22 7.75% 5.96%
Jul-22 6.75% 6.01%
Data Source: MOSPI / CEIC

The challenge is that controlling core inflation is a trade-off between government revenues and the larger goal of inflation control. That is the dilemma that the government faces today. The battle against inflation is having a fiscal cost in the form of duty cuts and that is impacting government revenues.

Now for the food basket story for Inflation July 2022

Here are some of the major highlights of the food basket story in July 2022

·         Meat and fish inflation tapered to 3.00% in July 2022 compared to 8.61% in June 2022 and 8.23% in May 2022. Egg Inflation was still negative at -3.84% in July 2022 compared to -5.48% in June 2022 and -4.64% in May 2022.

·         Fruits inflation bounced sharply to 6.41% in July 2022 compared to 3.10% in June 2022 and 2.33% in May 2022. Vegetable inflation tapered to 10.90% in July 2022 compared to 17.37% in June 2022 and 18.26% in May 2022. Vegetable inflation is tapering, but still high in absolute terms, especially considering its 13.2% weightage in the food basket.

·         Pulses inflation stood at 0.18% in July 2022 compared to -1.02% in June 2022 and -0.42% in May 2022. Cereals inflation was bounced to 6.90% in July 2022 compared to 5.33% in June 2022 and flat inflation in May 2022. Sugar inflation was higher at 4.80% compared to 4.17% in June 2022 and 4.27% in May 2022.

While the high protein food items are tapering, vegetables inflation is still in double digits. There has been a spike in cereals inflation due to lower acreage in this Kharif season.

Inflation on track, now focus on preserving growth

The RBI embarked on its hawkish journey in the special MPC meet in May 2022. In the MPC meetings of May, June and August 2022, the RBI hiked the rates by 140 bps in 3 tranches. In addition, the reverse repo rate was replaced with the SDF rate, which was tantamount to another hike of 40 bps. Also, to suck out liquidity from the system, the RBI hiked the CRR by 50 basis points. All these have had a cumulative impact on headline inflation as it tapered by 108 bps from 7.79% in April 2022 to 6.71% in July 2022.

Does that change the narrative of the RBI going ahead? The RBI would look for more ratification from the US Fed and the WPI inflation number. If the Fed turns less hawkish and the wholesale inflation falls below 15%, the RBI has reason to reduce its focus on inflation and look at growth levers. Even the IMF has clearly stated that India would be the fastest growing large economy in FY23 and FY24. India would not want to cede that advantage by being overtly hawkish!

December consumer inflation tapers further to 5.72%

  • 16 Jan , 2023
  • 7:39 AM
  • The CPI inflation (retail inflation) for December 2022 tapered further from 5.88% to 5.72%.

The CPI inflation (retail inflation) for December 2022 tapered further from 5.88% to 5.72%. That is 18 bps lower than the Bloomberg consensus, which had pegged CPI inflation for December at 5.90%. Inflation had fallen by 89 points in November, so the cumulative fall in inflation in the last 2 months is 105 bps. Now the CPI inflation is 207 bps lower than the peak level of 7.79% touched in April 2022. December marked the 39th month that CPI inflation exceeded the median target of 4%; but was also the second month that CPI inflation stayed under the RBI outer tolerance limit of 6%. This put less pressure on the RBI in drafting its narrative to the government on inflation.

One can argue that CPI inflation has fallen just 205 bps from the peak while the WPI inflation is down more than 1100 basis points from the peak. However, the WPI inflation is always more sensitive to monetary tightening. Also, the WPI inflation is normally a precursor to CPI inflation, so one can logically expect lower levels of CPI inflation. In December 2022, Food inflation fell by another 48 bps to 4.19% on top of a 234 bps fall in November. In the last 3 months, food inflation has fallen 441 basis points in all. One worry could be that core inflation bounced back to around 6.1%, offsetting the impact of food and fuel prices. With the base rising from December 2021 onwards; all the way to April 2022, there is scope for further tapering of CPI inflation in coming months.

One of the downsides of lower than expected Kharif output is the spike in cereals inflation. For December 2022, cereals inflation stands elevated at 13.79%, with rural cereals inflation much higher at 14.52%. However, there is a positive side to it. Delayed rains have ensured full reservoirs, which will boost the Rabi output. That is already evident in the 25% better wheat sowing acreage this Rabi season. Full year food grain output will still be impacted.

Rural food inflation remains the real challenge

Rural inflation continues to feel pressure on multiple fronts. On a MOM basis, the rural food inflation did fall from 5.22% to 5.05%. Even the headline rural inflation has fallen from 6.09% to 6.05%. However, in the monthly inflation basket mix, rural inflation is sharply higher than urban inflation, putting pressure on rural purchasing power. Here is how.

Out of the headline inflation of 5.72% for December 2022, rural inflation was 6.05% while urban India was just 5.39%. If you look at overall food inflation at 4.19%, rural food inflation was 5.05% while urban food inflation was 2.80%. In short, urban India is getting most of the gains of falling inflation. There are several instances of specific products too. In the food basket, rural inflation is higher than urban inflation for cereals, eggs, fruits and spices.

Rural inflation for fuel, transport and healthcare is lower than urban inflation. However, there are items like clothing, household goods and household services where rural inflation is meaningfully higher than urban inflation. The biggest gap is in the food basket, where the inflation in rural India is much sharper than in urban India.

Core inflation at 6.1% has been even flagged by RBI governor

Core inflation (the inflation excluding food and fuel), which had fallen to 5.9% in October, has bounced back to 6.1% in December. Core inflation is high in rural and urban areas and that is a structural issue. As long as core inflation remains elevated, it is hard for the headline inflation to come down meaningfully. The concerns are best articulated in the savings rate of Indian households falling from 7.3% of GDP in FY21 to 4% of GDP in FY22. This is an outcome of inflation putting a strain on urban and rural household budgets.

The structural nature of core inflation makes it tougher to manage and regulate and that is the key challenge. As another budget comes up in a few days, it is relevant to recap the Economic Survey ahead of Union Budget 2022. It had underlined the imperative need to focus on core inflation above headline inflation. The target has been to keep core inflation around 4%; but core inflation has stayed above 6% for 9 out of the last 13 months.

Month

Food Inflation (%)

Core Inflation (%)

Dec-21

4.05%

6.01%

Jan-22

5.43%

5.95%

Feb-22

5.85%

5.99%

Mar-22

7.68%

6.32%

Apr-22

8.38%

6.97%

May-22

7.97%

6.08%

Jun-22

7.75%

5.96%

Jul-22

6.75%

6.01%

Aug-22

7.62%

5.90%

Sep-22

8.60%

6.10%

Oct-22

7.01%

5.90%

Nov-22

4.67%

6.00%

Dec-22

4.19%

6.10%

Data Source: Ministry of Finance Estimates

India’s fiscal policy has often been at cross purposes with the monetary policy. Controlling core inflation is generally a trade-off between government revenues and the larger goal of inflation control. Fighting inflation has a fiscal cost in the form of duty cuts, and a focus on government revenues spikes inflation. Government has to deftly address this dilemma.

Inflation and the food basket in December 2022

Here are some of the major highlights of the food basket story for the month.

  • Let us first look at the high protein and high vitamin intake. Meat and fish inflation was higher at 5.13% while eggs bounced from 4.86% to 6.91%. Oils and fats bounced to positive from -0.63% to +0.53%. Inflation in milk and milk products edged higher from 8.16% to 8.51% in December 2022. 

     
  • Fruits inflation tapered further from 2.62% to 2.00% even as vegetable inflation dipped further into negative at from -8.08% to -15.08% in December 2022. Among other products, pulses inflation bounced from 3.15% to 3.89%, but the real issue with food inflation appears to be stemming from cereals inflation rising from 12.96% to 13.79%. 

Cereals, milk and other proteins remain key food inflation drivers. However, it was the sharp fall in vegetables inflation that brought down food inflation sharply in December 2022. Shorn of the vegetables effect, effective fall in food inflation may not be that impressive.

How does inflation data impact RBI rates trajectory?

RBI now has three positives to start with. US inflation is down to 6.5% so in terms of monetary divergence, the risk is not too high for the RBI. Secondly, the IIP output has bounced back from -4.22% to +7.11% in November. However, IIP has still been too volatile and dependent on the base effect. Thirdly, the CPI inflation has tapered by 15 basis points to 5.72%, which should give comfort to the RBI. Here is what the RBI can be expected to do in the coming couple of months.

  1. The February RBI policy may see a respite from rate hikes and the RBI may opt to wait and watch before taking a call on future rate hikes. The US Fed has also adopted a more gradual approach to hiking rates, mitigating the risk of monetary divergence.

     
  2. However, the RBI is not yet done with rate hikes and it is likely to hike rates by another 50 bps during the year, albeit in two tranches. That should be sufficient to keep inflation at bay.

     
  3. The February policy may not only see status quo on rates but even the RBI may look to calibrate its language to give an indication on peak rates or, at least, the levels where the interest rates could top out. 

At the end of the day, all these are normalcy assumptions and the deciding factor would still be the headline inflation. For now, core inflation remains a concern.

 

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  • 15 August, 2022 |
  • 10:45 AM

The CPI inflation (retail inflation) for the month of July 2022 came in at 6.71%, slightly lower than the Reuters consensus estimate of 6.78%.

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