The month of Oct-21 marks the fourth consecutive month CPI inflation was under 6%, but that is not saying much. Inflation is well above the RBI base target of 4%. The good news is that retail inflation at 4.48% is 182 bps below the peak level of inflation scaled in May-21.
The immediate trigger for the rise in headline inflation in Oct-21 was food inflation, which rose by 17 bps from 0.68% to 0.85%. This comes on top of a sustained fall of over 200 bps in food inflation between June and August. However, fuel inflation and transport inflation remained elevated at 14.35% and 10.90% respectively. That is due to Brent crude prices at $84/bbl. The impact of the cuts in excise and VAT will only be visible in November inflation.
Rural inflation moderates but urban food inflation spikes in Oct-21
Let us talk about rural inflation first. Compared to headline rural inflation of 4.13% in Sep-21, it has eased marginally to 4.07% in Oct-21. That is largely driven by a sharp fall in rural food inflation from 0.69% to 0.31%. However, the impact of inflation on a number of other items in the inflation basket remains elevated for rural India.
Let us focus on some of the key components of rural inflation. For example egg inflation has moderated considerably in rural India while vegetable inflation in rural India is -23%. However, oils and fats in the rural region are facing inflation of 36.7%, which is not good. Also, inflation in clothing, footwear and alcoholic beverages is much higher in rural India.
On the urban inflation front, the vegetable deflation at -12% is much lower than rural India. However, urban India appears to be bearing the brunt of higher fuel prices. For Oct-21, urban fuel and light inflation is 18% against 12.2% in rural India. Also, transport inflation at 12.57% is much higher than 9.17% in rural India. The dichotomy appears to be focussed.
Core inflation spikes to 6.11% in Oct-21
The big disappointment was core inflation. This is the residual inflation and excludes the impact of food and fuel. The core inflation is structural and hard to address with monetary policies. Core inflation peaked at 6.40% in May-21, and tapered to 5.77% in Sep-21.
However, in Oct-21, core inflation has bounced back to 6.11%, a 30 bps spike. While fuel is excluded from core inflation directly, it does have an indirect impact as it goes into the cost of production of all other products due to the strong externalities of oil.
For core inflation to come down, transport and fuel inflation must come down sharply as it has a strong cascading effect. The cut in excise and VAT on petrol and diesel will be the first step to toning down core inflation. The story will now depend on global crude prices as the centre and states do not have appetite for any further duty cuts.
Rural food inflation saves the day in Oct-21
Kharif was better than expected and brimming reservoirs, promise a robust Rabi crop this year. Attractive MSP, delayed rains and government addressing supply bottlenecks helped.
- Meat and fish inflation tapered to 7.12% in Oct-21 compared to 7.99% in Sep-21 and 9.19% in Aug-21. Egg Inflation in Oct-21 dipped to -1.38% compared to 7.06% in Sep-21 and 16.33% in Aug-21.
- Fruits inflation spiked to 4.92% in Oct-21 compared to 3.70% in Sep-21 and 6.69% in Aug-21. Vegetable inflation was at (-19.43%) in Oct-21 compared to (-22.47%) in Sep-21 and (-11.68%) in Aug-21. Vegetable prices stagnated in villages but spiked in urban India.
- Pulses inflation moderated further to 5.42% in Oct-21 compared to 8.75% in Sep-21 and 8.81% in Aug-21. Cereals inflation picked up to 0.41% in Oct-21 compared to (-0.61%) in Sep-21 and (-1.42%) in Aug-21. Sugar inflation bounced back to 5.36% in Oct-21 from 3.01% in Sep-21 and negative sugar inflation in Aug-21.
Policy options in front of the RBI
One thing is clear that inflation will now take centre stage for monetary policy.
- Firstly, core inflation has bounced back by 31 bps and that brings back the structural cost-push angle to the current inflation level.
- Secondly, fuel inflation could temper with the cuts in excise and VAT but it would still predicate on global Brent Crude prices.
- With IIP stabilizing at a durable level, RBI may have overlooked inflation for too long. With US inflation at 6.32%, even in India inflation will take centre stage for the RBI.