For Dec-21, CPI inflation at 5.59% was 58 bps higher than Nov-21. This is around the consensus estimates of inflation put out by Reuters for the month of Dec-21. To be fair, the inflation number was magnified due to the base effect. CPI inflation was 6.93% in Nov-20 but fell to 4.59% in Dec-20.
Dec-21 marked the 6th consecutive month CPI inflation was under 6% but it also marked the 27th-month retail inflation had been above the preferred RBI median of 4%. The tapering inflation trend between May and September this year was progressively reversed between October and December. Most of the pressure came from food prices.
The most prominent trigger for the spike in headline inflation in Dec-21 was food inflation, which rose 218 bps from 1.87% to 4.05%. This comes on top of a 102 bps spike in food inflation in October. 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 high but tapered to 10.95% and 9.65% respectively. While the cuts in central and state taxes had a salutary impact on inflation, However, the double digit increase in both items continue to put indirect pressure on core inflation.
Rural inflation much sharper than urban inflation in Dec-21
Rural inflation was sequentially up from 4.29% to 5.36%, driven by a sharp spike in rural food inflation; up from 1.09% to 3.46%. Rural vegetable inflation moderated to -8.20% but inflation in oils and fats stays elevated at 26.5%. Rural India is facing clothing and footwear inflation, both hovering around double digits. Rural fuel inflation is also elevated at 9.74%.
On the urban inflation front, the vegetables turned around and inflated at 6.14%, in contrast to negative vegetable inflation in rural India. Some of the big contributors of urban inflation were oils and fats at 20.40%, Fuel at 13.16% and transport at 10.74%.
Core inflation stays above 6% for third month in succession
After staying below 6% between July and September, core inflation stuck above the 6% mark for last 3 months of calendar 2021. Core inflation remained just above 6% for the third month in succession. In fact, core inflation has now been above 6% in six out of the last nine months; and being structural, it is a matter of concern.
In Dec-21, core inflation tapered but still held above 6%. By definition, core inflation excludes food and fuel. However, fuel does have an indirect impact due to the strong externalities of oil on other products and services.
The centre and states have already taken the initiative by cutting GST and VAT. However, that could be neutralized by Brent Crude inching up closer to $84/bbl. That will sustain the indirect pressure on core sector inflation.
How the food basket panned out in Dec-21?
Kharif output was better than expected and Rabi output is expected into the market soon. With reservoirs overflowing, even Rabi output is expected to set records. However, supply chain constraints and Omicron did push up food inflation in Dec-21.
• Meat and fish inflation tapered to 4.58% in Dec-21 compared to 5.55% in Nov-21 and 7.12% in Oct-21. Egg Inflation in Dec-21 came in 1.48% compared to -1.31% in Nov-21 and -1.38% in Oct-21.
• Fruits inflation tapered to 3.54% in Dec-21 compared to 6.03% in Nov-21 and 4.92% in Oct-21. Vegetable inflation was at (-2.99%) in Dec-21 compared to (-13.62%) in Nov-21 and a much lower level of (-19.43%) in Oct-21. Vegetable prices have remained subdued in rural India but spiked sharply in urban centres.
• Pulses inflation moderated further to 2.43% in Dec-21 compared to 3.18% in Nov-21 and 5.42% in Oct-21. Cereals inflation picked up further to 2.62% in Dec-21 compared to 1.51% in Nov-21 and 0.41% in Oct-21. Sugar inflation tapered to 5.58% in Dec-21 compared to 6.16% in Nov-21 and 5.36% in Oct-21.
Food basket has been largely a function of the vegetables and cereals component due to their high weightage.
Will sharply higher inflation hasten rate hikes by the RBI?
There were expectations of a rate hike in Dec-21 but concerns over 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 at 6.02% has stayed above 6% for the third month in succession and that brings back the structural cost-push angle to the inflation debate.
• Secondly, fuel inflation has tempered with cuts in excise and VAT but the impact would be largely neutralized by the price of Brent Crude moving up to $84/bbl.
• The one factor that could dissuade RBI from hiking rates in the Feb-21 policy is that Omicron resulted in Nov-21 IIP tapering to 1.42%, despite a negative base. That is not great news and the RBI may wait for growth impulses to normalize.
This is the last IIP data point that RBI has and if the Dec-21 core sector also shows pressure, RBI may be inclined to push off any rate hike decision to the April 2022 policy.