Sep-21 retail inflation moderates to 4.35% on Kharif boost

For the month of Sep-21, CPI inflation at 4.35% was 15 bps lower than the consensus estimate. To an extent, it was the base effect, but the record Kharif output also helped subdue food inflation.

Oct 13, 2021 09:10 IST India Infoline News Service

For the month of Sep-21, CPI inflation at 4.35% was 15 bps lower than the consensus estimate. To an extent, it was the base effect, but the record Kharif output also helped subdue food inflation. With food inflation falling to as low as 0.68%, headline inflation touched a 4-month low of 4.35%. It is still higher than the RBI inflation target of 4% but well below the upper tolerance limit of 6%. Headline inflation has fallen 95 bps over Aug-21 and a full 195 bps since the peak of May-21.

Data Source: MOSPI

The key trigger for the fall in headline inflation in Sep-21 was food inflation, which fell 243 bps from 3.11% to 0.68%. This comes on top of a 200 bps fall in food inflation between June and August. However, fuel inflation and transport inflation remained elevated at 13.63% and 9.53% respectively. That is not surprising considering Brent crude prices scaling above $84/bbl and fuel prices in India at life-time highs.

Rural inflation moderates to 4.13% in Sep-21

In July we saw rural and urban inflation tapering, unlike June when the movements were in opposite directions. In August, the rural inflation and urban inflation have fallen. In fact, the fall in rural inflation from 5.28% to 4.13% in Sep-21 has been sharper compared to urban inflation falling from 5.32% to 4.57%.

Let us look at where the impact of rural and urban inflation is most pronounced. Here is a look at rural inflation first. Rural food inflation has tapered to 0.69% and that is what is leading rural inflation lower. However, rural inflation for oils & fats at 37.1% is much higher than urban inflation at 28.9%. Similarly, for high protein foods like eggs and meat, rural inflation is much higher compared to urban inflation.

On the urban inflation front, the price rise is much higher for fuel & lighting and transport as compared to rural inflation. However, the fall in vegetable prices is much lower for urban India as compared to rural India. Similarly, inflation for sugar and confectionary items for urban India is also lower.

Core inflation tapers further to 5.77% in Sep-21

Since the core inflation peaked at 6.40% in May-21, it has progressively inched lower to 6.16% in Jun-21, 5.97% in Jul-21, 5.89% in Aug-21 and now 5.77% in Sep-21. While base effect is helping core inflation, downstream risks of fuel and transport inflation are real. In the last 1 year, core inflation has consistently stayed above 5.5%, which is 150 basis points above the comfort zone.

Data Source: MOSPI / CEIC

For core inflation at come to 4%, which is the ideal long term target, transport and fuel inflation must come down sharply as they have a strong cascading effect.  In the latest monetary policy, RBI governor hinted at the need to cut excise duties and state levies on petrol and diesel to rein in fuel inflation. However, despite the sharp spike in crude prices, domestic budgetary constraints at the central and state level will pre-empt any duty cuts.

Record Kharif output eased food prices in Sep-21

Despite weak monsoons to begin with, Kharif output was better than last year. The late rains have also filled up reservoirs, promising robust Rabi output this year. Attractive MSP, delayed rains and government addressing supply bottlenecks helped rein in food prices.

Let us quickly look at what helped food inflation taper from 3.11% to 0.68% in Sep-21.
  • Meat and fish inflation tapered to 7.99% in Sep-21 compared to 9.19% in Aug-21 and 8.33% in Jul-21. Egg Inflation in Sep-21 was sharply lower at 7.06% compared to 16.33% in Aug-21 and 20.82% in Jul-21.
  • Fruits inflation tapered to 3.70% in Sep-21 compared to 6.69% in Aug-21 and 8.91% in Jul-21. Vegetable inflation dipped further to (-22.47%) in Sep-21 compared to (-11.68%) in Aug-21 and (-10.58%) in Jul-21. Vegetable inflation is driving food prices lower.
  • Pulses inflation moderated marginally to 8.75% in Sep-21 compared to 8.81% in Aug-21 and 9.04% in Jul-21. Cereals inflation picked up to (-0.61%) in Sep-21 compared to (-1.42%) in Aug-21 and (-1.75%) in Jul-21. Sugar inflation bounced back from negative to report positive inflation of 3.01%.
Overall, it was vegetable inflation, with its 6.04% weight that pushed food inflation lower.

RBI has 3 broad ideas to focus on

The October 2021 monetary policy was dovish in its rates policy and monetary stance, but there are 3 broad ideas that emerge.
  • Firstly, core inflation continues to remain elevated and food inflation has always been cyclical due to its volatile base effect. That runs the risk of a spike in inflation.
  • Secondly, fuel inflation continues to be a major challenge with prices petrol and diesel rising in tandem with crude. The stronger downstream effects cannot be ignored.
  • Lastly, with IIP above pre-COVID levels, growth may not be a concern. That means; inflation spikes may force a rethink on monetary stance.
The IIP recovery in August, puts greater onus on inflation as a key driver of monetary policy in the coming months. The scene now shifts to December policy.

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