Headline inflation for Apr-21 must be viewed in the context of the desirable range of inflation as outlined by the RBI and approved by the Ministry of Finance. In last couple of months, CPI inflation had scaled above 5%, but this sharp fall brings inflation close to the median rate of 4%.
Urban versus rural inflation for Mar-21
Like in Mar-21, urban inflation contributed a much bigger share to the overall headline inflation and food inflation, in Apr-21 too. The 4.29% headline inflation was triggered by 4.77% urban inflation while rural inflation was just 3.82%. If you look at the food inflation in isolation, food inflation of 2.02% was driven by 3.15% urban inflation and just 1.45% rural inflation. The hidden risk in this data flow is that COVID 2.0 is spreading more aggressively to the rural areas and the hinterland. Lower rural inflation could indicate weak purchasing power in rural areas. That is hardly an encouraging scenario.
One reason for the urban/rural inflation divide is that food inflation has 45% share in the CPI inflation basket. Hence, the supply chain constraints afflicts food supply in urban areas in a big way. But, the concern is that the lower levels of rural inflation could be indicative of weak demand. It is OK, if it is just a temporary downcycle. The challenge would be if it is due to the inordinately high impact of COVID 2.0 in rural and semi-urban areas.
Some relief on core inflation, at last
The chart captures a comparison of food inflation and core inflation. Over the last few months, food inflation was easing but core inflation continued to move higher. In Apr-21, the core inflation has fallen from 5.96% to 5.20%. That shows that there are multiple factors compressing inflation to lower levels and that could be the good news.
Yes, inflation is sharply down but before we propose a toast, here is a word of caution. The sharp fall in core inflation is most likely an outcome of the base effect. Overall inflation was at 7.22% in Apr-20 so the base effect makes retail inflation look optically low. The core inflation index is still higher on a sequential (month-on-month) basis. That means the momentum and trajectory of core inflation will give clarity only in next few months.
Food became cheaper, but it was win some, lose some
Food inflation is lower by 285 basis points compared to Mar-21, but this could be largely on account of the base effect. For example, the food inflation was at a whopping 8.72% in Apr-20 so optically it may look like food has become cheaper in Apr-21.
Food inflation has a share of 45.8% in the overall CPI basket. Here is a look at what exactly drove food inflation lower in Apr-21.
- Meat and fish inflation actually surged higher in Apr-21 to 16.68% compared to 15.09% in Mar-21 and 11.34% in Feb-21. Egg Inflation has remained almost static at 10.55% in Apr-21, almost same as in Mar-21.
- Fruit inflation picked up further to 9.81% in Apr-21 compared to 7.86% in Mar-21 and 6.28% in Feb-21. Vegetable inflation remains deeply in negative at (-14.18%). This is much lower than (-4.83%) in Mar-21 and (-6.27%) in Feb-21.
- Pulses inflation fortunately tapered to 7.51% in Apr-21 compared to 13.25% in Mar-21 and 12.54% in Feb-21. Cereals inflation dipped further into negative at -2.96% compared to -0.69% in Mar-21 and -0.35% in Feb-21. Sugar was deeper in the negative at -5.99% in Apr-21 compared to -0.53% in Mar-21.
- It clearly looks like vegetables, cereals and sugar have managed to pull down the food inflation basket lower to 2.02%.
RBI will have to worry about US inflation too
In its April Monetary Policy, the RBI was quite emphatic about inflation risk. However, even as inflation has tapered to 4.29% in Apr-20, the RBI has a bigger challenge in the way the US inflation has scaled up to 4%. It is hard to recollect the last time India and the US had inflation rates so close to each other.
The dilemma is that if the US chooses to front-end rate hikes, the RBI may have to follow suit to avoid huge debt capital outflows. The bigger policy risk for the RBI will arise, not from domestic inflation, but the runaway US inflation.