Fuel inflation at 11.58% pushes May CPI inflation to 6.3%

After a sharp fall in CPI inflation to 4.29% in Apr-21, the consensus Reuters estimate for May-21 inflation was pegged at 5.30%. However, actual headline inflation came in sharply higher at 6.30%.

Jun 15, 2021 08:06 IST India Infoline News Service

Consensus estimates happen to be occasionally wrong and for May-21, CPI estimates were way off target. After a sharp fall in CPI inflation to 4.29% in Apr-21, the consensus Reuters estimate for May-21 inflation was pegged at 5.30%. However, actual headline inflation came in sharply higher at 6.30%. This is the highest level of CPI inflation since Nov-20, and can be partially attributed to the base effect, but there is more to the story.

Food inflation shot up sharply from 1.96% to 5.01% and that is significant considering that food basket has a 45.8% weight in the CPI index. The more worrying aspect is that fuel inflation shot up to 11.58% as daily revision in petrol and diesel prices take its toll. Core inflation (excluding food and fuel) has scaled to an 83-month high of 6.60%.

Data Source: MOSPI

May-21 sees a sharp spike in rural inflation

In the last few months to Apr-21, urban inflation made a bigger contribution to overall inflation. That trend reversed with rural inflation making a much bigger contribution in the  month of May-21 to headline inflation and food inflation. The 6.30% headline inflation was triggered by 6.04% urban inflation while rural inflation spurted from 3.82% in Apr-21 to 6.48% in May-21. Overall food inflation at 5.01% in May-21 was driven by 5.97% urban inflation while rural inflation rallied 3-fold from 1.45% to 4.52%. The positive side of this could be that COVID cases are receding in rural areas resulting in demand-driven price spike; but it is actually fuel that is playing a big part in rural inflation.

If you break up rural inflation, it is most pronounced in fuel at 10.4%, clothing at 7.44%, Pan/ tobacco at 10.51%, non-alcoholic beverages at 16.41% as well as non-vegetarian food categories. Clearly, fuel and core inflation appears to be hitting rural India quite hard.

Core inflation scales 83-month high at 6.60%

The chart captures a comparison of food inflation and core inflation over last 1 year. Over last few months, food inflation was easing but core inflation continued to move higher. Apr-21 saw a sharp fall in core inflation to 5.43%, but that optimism has got belied in May-21 as core inflation touched an 83-month high of 6.60%.
Data Source: MOSPI / CEIC

In our Apr-21 inflation report, we had cautioned that the sudden fall in core inflation was an outcome of base effect. Headline inflation was 6.26% in May-20 so the base effect has tapered compared to 7.22% in Apr-20. This led to spike in headline inflation in May-21. But the big focus would be the core inflation at 6.60% considering that the Economic Survey ahead of the Budget-21 had identified core inflation as the focus of macro policy.

Food becomes dearer as supply constraints pinch once again

Food inflation at 5.01% in May-21 was up by 305 bps higher. This virtually offsets the base effect enjoyed in Apr-21 when food inflation had tapered by 285 basis points. Food inflation has a share of 45.8% in overall CPI basket. Here is what drove food inflation higher in May.
  • Meat and fish inflation tapered to 9.03% in May-21 compared to 16.68% in Apr-21 and an elevated 15.09% in Mar-21. Egg Inflation was up sharply at 15.16% in May-21.
  • Fruits inflation picked up further to 11.98% in May-21 compared to 9.81% in Apr-21 and 7.86% in Mar-21. Vegetable inflation almost flattened out to (-1.92%) in May-21 compared to (-14.18%) in Apr-21 and (-4.83%) in Mar-21.
  • Pulses inflation sharpened to 9.39% in May-21 compared to 7.51% in Apr-21 and 13.25% in Mar-21. It is still lower than 3- month averages. Cereals inflation stayed in negative at (-1.42%) for May-21 compared to (-2.96%) in April and (-0.69%) in Mar-21. Sugar inflation was at (-1.37%) in May-21 compared to (-5.99%) in Apr-21.
  • It looks like vegetables, cereals, eggs and sugar have managed to spike up the food inflation basket (specifically proteins and carbs) sharply higher from 1.96% in Apr-21 to 5.01% in May-21.
Government has to act urgently on fuel inflation

Retail inflation in May-21 crossed above the outer limit of the RBI comfort zone of 6%. Remember, we are talking about median inflation of 4% with a worst-case scenario of 6%. Even that has been breached in May-21. But what could worry policy makers are the components. On the one hand, the supply chain constraints caused by COVID 2.0 resulted in a sharp spike in food inflation.

Secondly, fuel inflation at 11.58% is just not sustainable. That has a downstream impact on almost all products and services, which is evident in core inflation at an 83-month high of 6.60%. In the US, core inflation in May-21 touched a 29-year high. The message is clear. If oil prices are not checked, India could face tough monetary decisions in the coming months. Inflation in May-21 has given some pondering moments for the government and the RBI.

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