CPI Inflation tapers to 7.04% for May 2022

14 Jun 2022 , 12:12 PM

The inflation consensus estimate of 7.01% for the month of May 2022 was almost bang on target as the actual inflation figure for May 2022 came in at 7.04%. That is a welcome relief compared to the CPI inflation of 7.79% in the previous month of April 2022. The fall has been sharp in the case of food inflation and also in the case of core inflation.

However, May 2022 marks the 32^nd successive month that retail inflation stayed above the RBI median target of 4%. It was also the fifth consecutive month that headline inflation stayed above the upper tolerance limit of 6%. While food and core inflation tapered, oil inflation remained quite high. Also, economists are of the view that the June 2022 prices could still worsen due to prolonged heat wave conditions in the month. The first impression is that the tough tightening measures initiated by the RBI appears to be bearing fruit.

Data Source: MOSPI

After a long break, food inflation tapered from 8.38% in April 2022 to 7.97% in May 2022. The fall may not have been too sharp, but the tapering is a signal that food inflation is topping out. In the next couple of months, the Kharif crop progress should also help temper food inflation. In April 2022, food inflation had spiked by 70 bps from 7.68% to 8.38%. This 41 bps tapering of food inflation comes after six months of rise in food inflation to the tune of nearly 670 bps. Tepid Rabi arrivals did not help food prices this year.

In April 2022, fuel inflation had spiked to 10.80% and transport inflation had gone up to 10.91%. In comparison, both fuel and transport inflation for May 2022 are at 9.54%.

Rural inflation finally tapered in May 2022

The FMCG, two-wheeler and consumer durables companies had one major complaint in the last few months. Rural demand was tapering and that is hardly surprising. The food and non-food inflation had spiked sharply in rural areas and that had led to a constriction in demand. The good news is that rural inflation tapered in May 2022.

In last 1 year, rural inflation played a significant role in pushing up food inflation and headline inflation. In May 2022, rural inflation fell sequentially from 8.38% to 7.01%. Also, the rural food inflation tapered in May 2022 from 8.50% to 7.76%. Whether this is due to lower prices or due to purchasing capacity is yet to be confirmed, but hopefully it is not the latter, since that could be a setback for Indian companies relying on rural demand.

In terms of the rural food basket, inflation in oils & fats fell from 18.38% to 13.83%, spices from 11.19% to 9.96% but vegetable inflation spiked in May 2022. However, the high protein foods saw a sharp fall in rural inflation basket. In the rural basket, fuel tapered from 11.03% to 8.41%, clothing & Footwear from 10.76% to 8.81%, personal care effects from 9.31% to 5.78%, prepared snacks from 7.25% to 6.24%. Overall, rural inflation tapered.

Core inflation has tapered sharply to 6.09%

May 2022 marked the 8th successive month that core inflation stayed above 6%. However, core inflation at 6.09% was sharply lower than 7.24% in April 2022. Of course, crude is still above $120/bbl and so the downstream effect of a spike in oil, minerals and chemicals is not going away soon. Core inflation being more structural and stickier compared to food and fuel inflation, is normally tougher to manage.

Month	Food Inflation (%)	Core Inflation (%)
May-21	5.01%	6.40%
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%

Data Source: MOSPI / Bloomberg

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

How the food basket panned out in May 2022

Here are some highlights of the food basket in May 2022

·         Meat and fish inflation was up at 8.23% in May 2022 compared to 6.97% in April 2022 and 9.63% in March 2022. Egg Inflation dipped into negative at -4.64% in May 2022 compared to 0.00% in April 2022 and 2.44% in March 2022.

·         Fruits inflation tapered to 2.33% in May 2022 compared to 4.99% in April 2022 and 2.54% in March 2022. Vegetable inflation spiked further to 18.26% in May 2022 compared to 15.41% in April 2022 and 11.64% in March 2022. Considering its 13.2% weightage in the food basket, vegetables are a major trigger of food inflation.

·         Pulses inflation dipped into negative at -0.42% in May 2022 compared to 1.86% in April 2022 and 2.57% in March 2022. Cereals inflation also tapered to 5.33% in May 2022 compared to 5.96% in April 2022 and 4.93% in March 2022. Sugar inflation was lower at 4.27% in May 2022 compared to 5.22% in April 2022.

Barring vegetables, meat and fish, inflation in most of the other food products moderated in May 2022. More importantly, food inflation moderated in rural India.

Message from RBI is; Inflation control above all else

The RBI surprised the street with an unscheduled MPC meet in May 2022, hiking the repo rates by 40 bps and the CRR by 50 bps. This was followed up with another 50 bps rate hike in the June 2022 MPC meeting. Effectively, RBI has hiked repo rates by 90 bps and CRR by 50 bps, amplifying the monetary tightening. That is already bearing fruit in the form of tapering of inflation across most commodities in the basket.

However, there are 3 domestic factors that RBI would be focussing on. India’s vulnerability to oil remains high, although cheap Russian oil would have substantially mitigated this impact. Secondly, RBI has already clarified that between boosting growth and reining in inflation, RBI had chosen the latter. Thirdly, RBI would be conscious that the heat wave in June could worsen inflation next month.

Then there are global triggers too. US Fed is ultra-hawkish and that will rub off on the RBI policy too. Also, the weakness in the rupee is likely to add to imported inflation. These would be the inflation challenges in the coming months.