CPI Inflation tapers to 7.01%, below street expectations

13 Jul 2022 , 11:52 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!