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November consumer inflation falls sharply to 5.88%

  • India Infoline News Service
  • 13 Dec , 2022
  • 9:24 AM
On a sequential basis, CPI inflation has fallen by 89 basis points and the fall in the last 2 months has been to the tune of 153 basis points. But there are some specific reasons to celebrate. October may be the 38th month that CPI inflation has exceeded median target of 4%. However, for the first time since December 2021, the headline inflation has fallen below the outer RBI tolerance limit of 6%. RBI would now certainly have a more positive narrative to share with the government on inflation.

If you compare the November inflation to the peak level of 7.79% in April 2022, the inflation has tapered by 191 bps from the peak. In contrast, the WPI inflation has already fallen by more than 800 basis points between May and October 2022. However, CPI inflation normally follows the WPI inflation with a lag. In November 2022, Food inflation fell sharply by 234 basis points from 7.01% to 4.67%. Food inflation has fallen 393 bps in last 2 months. One worry could be that core inflation bounced back to around 6%, offsetting the impact of food and fuel prices. With the base rising from November 2021 onwards, there is scope for further tapering of CPI inflation in the coming months; assuming supply chains don’t put too much pressure on prices.



Data Source: MOSPI

One of the downsides of lower than expected Kharif output is the spike in cereals inflation. For November, cereals inflation stands at 12.96%, with rural cereals inflation much higher at 13.61%. On the positive side, late rains have ensured full reservoirs, which will boost Rabi output. That is already evident from the 25% better wheat sowing acreage this Rabi season.

Rural inflation is the real pain point for India

Rural inflation continues to feel pressure on multiple fronts. On a MOM basis, the rural food inflation fell from 7.30% to 5.22%. Even the headline rural inflation has fallen from 6.98% to 6.09%. However, in the monthly inflation basket mix, rural inflation is much higher than urban inflation, putting pressure on rural purchasing power.

Out of the headline inflation of 5.88% for November 2022, rural inflation was 6.09% while urban India was 5.68%. If you look at overall food inflation at 4.67%, rural food inflation was 5.22% while urban food inflation was 3.69%. We spoke about rural cereal inflation being much higher than urban cereal inflation. But there are more instances. In the food basket, rural inflation is sharply higher than urban inflation for eggs, fruits and spices.

However, the rural basket was not just about food but also about the non-food items. Rural fuel inflation is lower but transport inflation is higher. In rural India, the clothing inflation at 9.86% is higher than 8.93% for urban India. Rural inflation is, however, lower than urban inflation in products like footwear, healthcare, recreation and education.

Core inflation back at 6% on supply chain constraints

Core inflation (the inflation excluding food and fuel), which had fallen to 5.9% in October, has bounced back to 6.0% in November. Core inflation could actually have been much higher but for weak rural inflation, which is an outcome of weak rural demand. As income levels have suffered and rural inflation continues to be high, it impacts rural demand. That means, if rural income levels bounce back, spike in core inflation could be quite sharp.

The structural nature of core inflation makes it tougher to manage and regulate and that is the key challenge. The last Economic Survey ahead of the Union Budget 2022 underlined the need to focus on core inflation above headline inflation. The target has always been to keep Core inflation around 4%, but core inflation has stayed above 6% for 8 out of the last 13 months, creating a concern at the policy level.

Month Food Inflation (%) Core Inflation (%)
Nov-21 1.87% 6.08%
Dec-21 4.05% 6.01%
Jan-22 5.43% 5.95%
Feb-22 5.85% 5.99%
Mar-22 7.68% 6.32%
Apr-22 8.38% 6.97%
May-22 7.97% 6.08%
Jun-22 7.75% 5.96%
Jul-22 6.75% 6.01%
Aug-22 7.62% 5.90%
Sep-22 8.60% 6.10%
Oct-22 7.01% 5.90%
Nov-22 4.67% 6.00%
Data Source: Ministry of Finance Estimates

In its latest issue of World Economic Outlook (WEO), the International Monetary Fund (IMF) had highlighted Indian policy ambiguity in handling core inflation. The IMF observed that India’s fiscal policy had often been at cross purposes with monetary policy. Controlling core inflation is a trade-off between government revenues and the larger goal of inflation control. Any battle against inflation has a fiscal cost in the form of duty cuts, and a focus on government revenues spikes inflation. That is where the government is in a dilemma.

How inflation impacted the food basket in November 2022

Here are some of the major highlights of the food basket story for the month.
  • Let us first look at the high protein and high vitamin intake. Meat and fish inflation was higher at 3.87% while eggs bounced back from negative to 4.86%. Oils and fats were subdued at -0.63%. However, inflation in milk and milk products remained higher at 8.16% for November 2022.
  • Fruits inflation tapered further to 2.62% even as vegetable inflation dipped into negative at -8.08% in November 2022. Among other products, pulses inflation bounced to 3.15%, but the crux of the food inflation problems appears to be stemming from cereals inflation at 12.96%. Foodgrain output has been hit badly by erratic monsoons and unless Rabi crop comes into the market, the pressure is likely to sustain on cereals prices.
Overall, cereals, milk and vegetables remain the key food inflation drivers. However, it was the sharp fall in vegetables inflation into negative territory that brought down food inflation so sharply in November 2022. Shorn of the vegetables effect, effective fall in food inflation in November may not be that impressive.

Where does the RBI go from here?

Now the RBI has two key data points. For November 2022, the headline inflation has fallen sharply to 5.88%. At the same time, the IIP growth for October dipped to -4.0%, putting pressure on the overall GDP for the next two quarters. Inflation may have come down sharply but growth is clearly suffering. It is not entirely due to RBI policy, since global headwinds have also contributed to the fall in IIP. However, it is time for the RBI to act on the variable they control and make money cheaper for Indian business. The message is that inflation is coming down in a decisive manner. RBI has rightly maintained an anti-inflation stance since April 2022. For a growth-dependent economy like India, this could be the right time to shift gears and focus on growth once again; as Jayanth Varma suggests.

RBI must now change the narrative and talk less about inflation and more about growth. RBI has done its bit for toning down inflation expectations and ensuring price stability. Rest of the adjustment process will be on auto mode. However, the current situation of high input inflation, high interest rates and tight liquidity is hardly favourable if India dreams of being the fastest growing large economy in FY23. RBI will have to lend a helping hand in the form of easy liquidity and lower cost of funds.


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October consumer inflation falls decisively to 6.77%

  • India Infoline News Service
  • 15 Nov , 2022
  • 9:44 AM
On a sequential basis, CPI inflation has fallen by 74 basis points. However, at a broader level, there still are some concerns. October is the 37th month that CPI inflation has exceeded median target of 4%. October also marks the 10th month in a row, when the inflation has been outside the 6% upper tolerance limit of RBI. The RBI has a lot of answering to do to the government, although the special meeting of the MPC may have already addressed the issue.

Actually if you compare the October inflation to the peak level of 7.79% in April 2022, the inflation has tapered by just 102 bps from the peak. In contrast, the WPI inflation has fallen by more than 800 basis points since May 2022. However, that would be like comparing apples and oranges, since the CPI inflation normally follows the WPI inflation with a time lag. In October 2022, Food inflation fell sharply by 159 basis points from 8.60% to 7.01%. Even core inflation fell to 5.9% in October. But one must focus on the base effect for a moment. The CPI inflation in October 2021 was 4.48% and since then it has been on an uptrend. That means; in the next few months, the base effect should favour lower inflation. That is assuming that supply chains don’t put too much pressure on prices.


Data Source: MOSPI

One of the negative outcomes of the lower than expected Kharif output this year is the spike in cereals inflation. For October, cereals inflation stands at 12.08%, but cereals inflation in rural India is much higher at 12.66% compared to just 10.86% in urban India. On the positive side, the late rains have also ensured full reservoirs, so the government expects the Rabi output to make up for the Kharif shortfall. We have to wait and watch.

Rural inflation is possibly the crux of the problem

There has been a mixed trend on the inflation front in rural India. On a MOM basis, the rural food inflation fallen from 8.53% to 7.30%. Even the headline rural inflation has fallen from 7.56% to 6.98. However, in the monthly inflation basket mix, rural inflation is much higher than urban inflation. That is putting a lot of pressure on rural purchasing power.

Out of the headline inflation of 6.77% for October 2022, rural India was at 6.98% while urban India was lower at 6.50%. If you look at overall food inflation at 7.01%, rural food inflation stands at 7.30% while urban food inflation is much lower at 6.53%. We spoke about rural cereal inflation being much higher than urban cereal inflation. But there are more instances. For example, in the food basket, rural inflation is sharply higher than urban inflation in the case of fruits, vegetables and spices.

However, the rural basket was not just about food but also about the non-food items. Rural fuel inflation is lower but transport inflation is higher. In rural India, the clothing inflation at 10.18% is higher than 9.14% for urban India. It must also be noted that rural inflation is lower than urban inflation in products like footwear, healthcare, recreation and education.

Core inflation drops below 6%, perhaps, due to weak rural demand

Core inflation (the inflation excluding food and fuel) fell to 5.9% in the month of October. However, it would be too early to celebrate. A lot of the fall in core inflation is driven by rural India and that is obviously a direct outcome of weak demand. As income levels have suffered and inflation continues to be high in rural India, it has had an impact on rural demand. If you look at the break-up of rural inflation, the maximum reduction has come from the rural segment. That is not a good signal as it shows pressure on demand.

The structural nature of core inflation makes it tougher to manage and regulate and that is the key challenge. The last Economic Survey ahead of the Union Budget 2022 underlined the need to focus on core inflation more than headline inflation. The target has always been to keep Core inflation around 4%, but core inflation has stayed above 6% for 5 out of the last 8 months. Ideally, core inflation of around 4% would be a big trigger for lower inflation levels.

Month Food Inflation (%) Core Inflation (%)
Oct-21 0.85% 6.06%
Nov-21 1.87% 6.08%
Dec-21 4.05% 6.01%
Jan-22 5.43% 5.95%
Feb-22 5.85% 5.99%
Mar-22 7.68% 6.32%
Apr-22 8.38% 6.97%
May-22 7.97% 6.08%
Jun-22 7.75% 5.96%
Jul-22 6.75% 6.01%
Aug-22 7.62% 5.90%
Sep-22 8.60% 6.10%
Oct-22 7.01% 5.90%
Data Source: Ministry of Finance Estimates

One must not lose sight of what the last IMF World Economic Outlook (WEO) had said about Indian policy ambiguity about handling core inflation. The concern for the IMF was that, quite often, India’s fiscal policy had been at cross purposes with monetary policy. Here is the dilemma! Controlling core inflation is a trade-off between government revenues and the larger goal of inflation control. Any battle against inflation has a fiscal cost in the form of duty cuts, and a focus on government revenues spikes inflation.

Food basket inflation story for October 2022

Here are some of the major highlights of the food basket story for the month.

·         Let us first look at the high protein and high vitamin intake. Meat and fish inflation was higher at 3.08% while eggs saw negative inflation of -0.18% oils and fats were also subdued at -2.15%. However, the inflation in mild and milk products remained high at 7.69% for the month of October 2022.


·         Fruits inflation remained under control at 5.20% even as vegetable inflation came under control at 7.77% in October 2022. Among other products, pulses inflation was subdued at 2.78%, but the crux of the food inflation problems appears to be stemming from cereals inflation at 12.08%. Foodgrain output has been hit badly by erratic monsoons and a weak Kharif and the bet is now that the Rabi should make for the losses.

Overall, cereals, milk and vegetables remain the pressure point for October 2022 inflation, although vegetables also contributed to the tapering of consumer inflation.

RBI may be readying to shift gears

In our previous report, we had written that RBI was in the horns of a dilemma because inflation was not coming down but growth was suffering. The RBI stance had to take a middle path. Now there is a lot more clarity. The message form the US and India is that inflation is coming down in a decisive manner. For a growth-dependent economy like India, this could be the right time to shift gears and focus on growth; as Jayanth Varma suggests.

It is time for the RBI to change the narrative and talk less about inflation and more about growth. RBI has done its bit for bringing down inflation, toning down inflation expectations and ensuring price stability. The rest of the process has to be market driven. However, the current situation of high input inflation, high interest rates and tight liquidity is hardly conducive to rapid GDP and IIP growth. Moody’s expects India GDP growth in 2022 to outshine China by 400 bps. It is time for the RBI to help the Indian economy walk the talk!

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  • 15 November, 2022 |
  • 12:58 PM

The CPI inflation (retail inflation) for the month of October 2022 came in at 6.77%. That is a marginal 4 bps higher than the Bloomberg consensus estimate of 6.73%.

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  • IIFL News Service |
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