Nov-21 retail inflation scales 4.91% as food inflation puts pressure

Nov-21 marked the fifth consecutive month CPI inflation was under 6% and the third consecutive month it was under 5%.

December 14, 2021 10:32 IST | India Infoline News Service
For Nov-21, CPI inflation at 4.91% was 43 bps higher than October. However, the good news is that CPI inflation was well below the consensus Reuters estimate of 5.10%. This inflation number could have been much higher had it not been for the base effect. Remember, CPI inflation was 6.93% in Nov-20, boosting the base.

Nov-21 marked the fifth consecutive month CPI inflation was under 6% and the third consecutive month it was under 5%. However, inflation is substantially above the RBI base target of 4%. The good news is that retail inflation at 4.91% is 202 bps below the level of inflation scaled in Nov-20.

Data Source: MOSPI

The immediate trigger for the rise in headline inflation in Nov-21 was food inflation, which rose 102 bps from 0.85% to 1.87%. Food inflation has been consistently higher in last 3 months, although Rabi crop arrivals are expected to improve the situation. Fuel inflation and transport inflation remained elevated at 13.35% and 10.02% respectively. However, both these are lower on a sequential basis due to tax cuts on petrol and diesel.

Rural and urban inflation propped up in Nov-21

Let us talk about rural inflation first. Rural inflation is sequentially up from 4.07% to 4.29%. That is driven by a very sharp spike in rural food inflation; up from 0.31% to 1.09%. Some of the components of rural inflation spike are interesting.

Vegetable inflation in rural India has moderated by -18.43% but the inflation in oils and fats is up 32.3%. Rural India is also feeling the pressure of housing inflation as well as fuel and transport inflation.

On the urban inflation front, the vegetable deflation at -4.86% is much lower than rural India, but even oil and fats inflation is much lower than rural India. However, urban India appears to be bearing the brunt of higher fuel prices with urban fuel and light inflation at 17.26% against 11.16% in rural India. Also, transport inflation at 11.59% is much higher than 8.54% in rural India.

Core inflation spikes to 6.14% in Nov-21

Core inflation remained above 6% for the second month in succession. In fact, core inflation has been above 6% in 4 out of the last 7 months. The core inflation is structural and much tougher to address with monetary policies. Core inflation peaked at 6.40% in May-21, but it has risen sharply by 38 bps in last 2 months.

In Nov-21, core inflation bounced 8 bps to 6.14%. While fuel is excluded from core inflation, it does have an indirect impact due to the strong externalities of oil and its ability to seep into the prices of other commodities.

Data Source: MOSPI / CEIC

The centre and states have taken the initiative by cutting aggressively on excise and VAT. The actual challenge is about the supply chain constraints as that is captured indirectly by the core inflation continuing to remain sticky at high levels. This is actually a global phenomenon, where core inflation is driving retail inflation higher.

How the food basket panned out in Nov-21?

Kharif output has been better than expected and the Rabi output is expected into the market soon. With reservoirs overflowing, even Rabi output is expected to set records. Here is how food inflation panned out in Nov-21.
  • Meat and fish inflation tapered to 5.55% in Nov-21 compared to 7.12% in Oct-21 and 7.99% in Sep-21. Egg Inflation in Nov-21 came in at -1.31% compared to -1.38% in Oct-21 and pricey levels of 7.06% in Sep-21 and 16.33% in Aug-21.
  • Fruits inflation spiked further to 6.03% in Nov-21 compared to 4.92% in Oct-21 and 3.70% in Sep-21. Vegetable inflation was at (-13.62%) in Nov-21 compared to (-19.43%) in Oct-21 and (-22.47%) in Sep-21. Vegetable prices remained at low levels in villages but spiked in urban India.
  • Pulses inflation moderated further to 3.18% in Nov-21 compared to 5.42% in Oct-21 and 8.75% in Sep-21. Cereals inflation picked up further to 1.51% compared to 0.41% in Oct-21 and (-0.61%) in Sep-21. Sugar inflation bounced back to 6.16% in Nov-21 compared to 5.36% in Oct-21 and 3.01% in Sep-21.

Food basket has been largely a function of the vegetables and cereals component due to their high weight exposure.

Will the RBI change policy focus to inflation?

That should have ideally happened in the Dec-21 policy but concerns like the Omicron virus and Evergrande tied down the hands of the RBI. Here are some key takeaways for RBI policy action in the coming months.
  • Firstly, core inflation has bounced back to 6.14% and that brings back the structural cost-push angle to the inflation debate.
  • Secondly, fuel inflation could temper with the cuts in excise and VAT but the impact has still been quiet minimal due to supply chain constraints.
  • With IIP stabilizing at above 3% levels and now growing above pre-COVID levels, RBI may have given inflation control a skip for too long. With US inflation at 6.8%, it may be time for the RBI to put inflation at the centre of monetary policy.

Clearly, the RBI is biding time and the Dec-15 Fed meeting could be an important indicator of what will happen to rates in India.

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