It is marginally lower by 3 bps compared to May 2022, but the full impact of lower prices of oil, minerals and food products is not yet fully factored in. Despite best efforts, the overall inflation continues to remain above 7% for the third month in a row. It is the sixth consecutive month that inflation has been above the outer RBI tolerance level of 6%.

Interestingly, June 2022 also marks the 33rd successive month that retail inflation stayed above the RBI median target of 4%. While food inflation tapered marginally, core inflation almost remained flat at 6.11%. Thanks to the RBI tightening measures, the consumer inflation has fallen in the last 2 months from a high of 7.79% in April 2022 to 7.01% in June.



Data Source: MOSPI

In May 2022, we witnessed the first signs of food inflation tapering from 8.38% to 7.97%. In June 2022, food inflation tapered further to 7.75%. This indicates that food inflation is topping out in the near-term and the Kharif arrival in the market could further temper food inflation. However, the tapering of food inflation in the last two months must be seen in the context of the surge over the 6 months prior to that. Between April and June, Food inflation tapered by 63 bps. However, this comes after a 670 bps spike in the six months prior to that. Tepid Rabi arrivals did not help food prices this year.

In June 2022, fuel inflation has again spiked to 10.39% compared to 9.54% in May 2022. However, transport inflation has sharply fallen from 9.5% to 6.9% in June 2022.

Rural food inflation tapered further in June 2022

There has been a mixed trend on the inflation front in rural India. On a MOM basis, the rural food inflation tapered from 7.76% to 7.61%. However, the overall rural inflation has gone up marginally from 7.08% to 7.09%, indicating that non-food items are putting pressure on rural inflation.

It looks like Rural India is facing the impact of non-food inflation much more than food inflation. Supply chain constraints are still exerting pressure on inflation in rural areas and that has led to a spike in rural core inflation with most of the lifestyle products seeing a sharp spike in inflation in rural areas.

In terms of the rural food basket, inflation in oils & fats fell sharply from 13.83% to 9.30% while spices inflation spiked from 9.96% to 11.12%. Vegetable inflation spiked to 15.69% in June 2022. High protein foods like eggs and milk saw a sharp fall in rural inflation basket with egg inflation dipping into the negative. In the rural basket, fuel bounced from 8.41% to 9.25%, clothing & Footwear from 8.81% to 9.60% and personal care effects from 5.78% to 6.34%. In short, rural food inflation tapered, but other items ended higher.

Core inflation almost flat at 6.11% in June 2022

May 2022 marked the 8th successive month that core inflation stayed above 6%. However, core inflation at 6.11% is sharply lower than 7.24% in April 2022. In a sense, the key drivers of core inflation like crude and minerals have fallen in the last one month, but the trickle-down effect will take some more time to manifest in core inflation. The structural nature of core inflation makes it tougher to manage and regulate.

Month	Food Inflation (%)	Core Inflation (%)
Jun-21	5.15%	6.11%
Jul-21	3.96%	5.93%
Aug-21	3.11%	5.77%
Sep-21	0.68%	5.76%
Oct-21	0.85%	6.06%
Nov-21	1.87%	6.08%
Dec-21	4.05%	6.02%
Jan-22	5.43%	6.21%
Feb-22	5.85%	6.22%
Mar-22	7.68%	6.53%
Apr-22	8.38%	7.24%
May-22	7.97%	6.09%
Jun-22	7.75%	6.11%

Data Source: MOSPI / Bloomberg

There is also a policy perspective to core inflation. Controlling core inflation has to necessarily be a trade-off between government revenues and the larger goal of inflation control. That is the dilemma that the government finds itself in. The battle against inflation is having a fiscal cost in the form of duty cuts resulting in lower revenues.

Here is the food basket story for June 2022

Here are some of the major highlights of the food basket story in June 2022

·         Meat and fish inflation was up at 8.61% in June 2022 compared to 8.23% in May 2022 and 6.97% in April 2022. Egg Inflation dipped deeper into negative at -5.48% in June 2022 compared to -4.64% in May 2022 and 0.00% in April 2022.


·         Fruits inflation bounced back to 3.10% in June 2022 compared to 2.33% in May 2022 and 4.99% in April 2022. Vegetable inflation remained problematic at 17.37% in June 2022 compared to 18.26% in May 2022 and 15.41% in April 2022. Considering its 13.2% weightage in the food basket, vegetables are a major inflation trigger.


·         Pulses inflation dipped deeper into negative at -1.02% for June 2022 compared to -0.42% in May 2022 and 1.86% in April 2022.

Cereals inflation was at 5.33% in June 2022 almost at par with May 2022. Sugar inflation was lower at 4.17% in June 2022 compared to 4.27% in May 2022 and 5.22% in April 2022.

While rural food inflation moderated in June, urban food inflation continued to remain elevated on the back of a spike in vegetables inflation.

Message from RBI; Get prepared for another rate hike

The RBI surprised the street with an unscheduled MPC meet in May 2022, hiking the repo rates by 40 bps and CRR by 50 bps. This was followed by another 50 bps rate hike in the June 2022 MPC meeting. With 90 bps of rate hikes done, the RBI only needs to hike rates by 20 bps to restore interest rates to pre-pandemic levels. The tightening has brought down inflation. The question is what about the August 2022 monetary policy?

For now it looks like another 35-50 bps rate hike may be on the cards in the August policy. RBI may prefer to err on the side of caution and hike repo rates above the pre-pandemic rates. That would give them more policy leeway in the future. But it cannot be a decision in isolation. A lot will depend on how the June consumer inflation in the US pans out. If the US inflation is still above 8% and the India WPI inflation is above 15%, then rest assured that this is not yet the end of the rate hike cycle. There is surely more to come!

Just as the surge in CPI inflation had been arrested, it looks like the surge in WPI has also been arrested. It may be recollected that between February 2022 and May 2022 wholesale price inflation (WPI) had surged 320 bps from 13.43% to 16.63%. In comparison, the WPI inflation tapered to 15.18% in June 2022 and dropped further to 13.93% in July 2022.

Since the first round of RBI rate hikes in May 2022, WPI inflation dropped by 270 bps. There are still two factors to worry about. Firstly, the May inflation final revision took WPI inflation from 15.88% to 16.63%. Secondly, the 13.93% WPI inflation in July 2022 is on a rather high base of 11.57% in July 2021. Also, fuel inflation spiked in July 2022 to well above 43%.

Here is why WPI inflation is as material to RBI monetary policy as CPI inflation. The highest weightage in CPI inflation is assigned to the food basket while WPI inflation assigns the highest weight of 64.23% to manufactured products. WPI inflation is a better barometer of producer costs. In the current scenario, where supply chain constraints are driving inflation, WPI inflation gives a better picture. That is why the RBI would breathe a lot easier with WPI inflation falling well below the 14% mark and losing 270 bps from its recent peak.

WPI inflation has been in double digits for 16 consecutive months

July 2022 marked the 16th consecutive month of double-digit WPI inflation, but fell below 14% for the first time since February 2022. There is significant respite compared to the 31-year high WPI inflation of 16.63% reported in May 2022. WPI inflation has been worsened by the Ukraine war, Russia sanctions, China lockdown and monetary tightness.



Data Source: Office of the Economic Advisor

Manufacturing inflation yoy tapered from 11.39% in April 2022 to 10.27% in May 2022, 9.19% in June 2022 and now to 8.16% in July 2022. Since manufacturing has a weightage of 64.23% in the WPI basket, it will surely keep overall WPI inflation in check. However, food and fuel are major risks. In the overall WPI basket; only onions and oilseeds are showing negative WPI inflation, while the producer inflation in pulses is virtually flat.

The highest producer inflation in July 2022 was in crude petroleum and natural gas at 65.84%, Potatoes at 53.5%, LPG at 32% and fruits at 29% were elevated too. One thing that beats analysis is why is oil inflation higher despite falling crude prices and cheaper oil imports from Russia. One can argue that this is a yoy number, but crude oil and gas inflation has surged even on sequential MOM basis.  

Story of WPI components over last 3 months

Commodity Set	Weight	Jul-22 WPI	Jun-22 WPI	May-22 WPI
Primary Articles	0.2262	15.04%	19.22%	18.84%
Fuel & Power	0.1315	43.75%	40.38%	49.00%
Manufactured Products	0.6423	8.16%	9.19%	10.27%
WPI Inflation	1.0000	13.93%	15.18%	16.63%
Food Basket	0.2438	9.41%	12.41%	10.58%

Data Source: Office of the Economic Advisor

In the last few months, we have seen primary articles inflation and food basket inflation staying elevated. However, in July 2022, there is a visible tapering of primary articles inflation and food basket inflation. The overall vegetables basket inflation has come down sharply led by negative onion inflation. That has resulted in lower food inflation. Even mining products are down as is evident from primary articles inflation falling to a greater extent than food inflation. Primary Articles inflation surged from 18.84% in May 2022 to 19.22% in June 2022, but fell sharply to 15.04% in July 2022. This is an important trigger that has helped the overall WPI inflation to taper.

Fuel continues to be a problem. Between May 2022 and June 2022, fuel inflation fell from 49% to 40.38%. However, in July 2022, the fuel inflation has again spiked to 43.75%, but this can be largely attributed to non-crude related fuel and due to the base effect. The spike in the prices of petrol and diesel has not kept pace with the spike in crude oil and that the outcome is evident in the massive losses that the OMCs like IOC, BPCL and HPCL have recorded in Q1FY23.

On the positive side, the manufacturing inflation has fallen consistently from 11.39% in April 2022 to 8.16% in July 2022. Clearly, the tightness forced by the RBI and the fears of a recession globally have led to tapering of manufacturing inflation. In the context of WPI inflation, manufacturing has a lot more importance due to its weight of 64.33% in the WPI basket. It looks like a situation wherein higher prices combined with recession fears are keeping demand for manufactured products subdued. But, caution is not good economics.

How the high frequency data looked in July 2022

While WPI inflation is generally presented YOY, the high frequency data on a MOM basis gives useful insights on the short term momentum.

·         For July 2022, overall MOM WPI inflation was down -0.13%, so the momentum is consistently tapering. That is a sharp tapering of the high frequency WPI inflation number from 2.48% in the month of March 2022 to -0.13% in July 2022.


·         The MOM data captures the short term momentum. A clear picture of the pressure point is evident if you look at the primary articles inflation. Within primary basket, while the food basket has contracted MOM, the overall primary basket is down much sharper. Hopefully, the news of a decent Kharif should bring down wholesale food prices too.


·         June 2022 saw manufacturing inflation on a MOM basis dip into the negative at -0.90% and in July it is still negative at -0.42%. It has steadily fallen from a high of 2.45% in March 2022. The only exception is the fuel inflation, which is up 6.56% in July 2022, over the previous month.

MOM numbers capture short term trends better but they also tend to be vulnerable to short term base effects. The message is inflationary only on the oil and gas front.

Why the RBI will breathe a sigh of relief

Between April 2022 and July 2022, consumer inflation (CPI inflation) tapered from 7.79% to 6.71%. Now, between May 2022 and July 2022, WPI inflation has also fallen from 16.63% to 13.93%. RBI has already hiked repo rates by 140 bps between May and August 2022 and CRR by 50 basis points. The effect is showing now on CPI inflation and also on WPI inflation. WPI inflation has an import content, so the global commodity taper has helped matters.

The Q1FY23 corporate results are done and dusted. While net profits for Q1FY23 are up yoy, they are sharply lower on QOQ basis. That is largely due to the downstream oil companies. It remains to be seen how the RBI interprets this data. Hopefully, if August inflation also maintains the downward journey, the RBI will have reason to go slow on its hawkishness. That is what the Fed may do and the RBI may also gradually shift its focus from containing inflation to boosting growth. That is where the core edge of Indian economy lies.