Feb-22 retail inflation inches higher to 6.07% on fuel boost

16 Mar 2022 , 08:59 AM

The saga of rising inflation has continued since Sep-21. Between Sep-21 and Feb-22, rate of CPI inflation increased by 172 bps from 4.35% to 6.07%. Retail inflation is still below the May-21 peak of 6.30%, but that will be taken out if crude prices are factored into fuel prices.

In Jan-22, the CPI inflation crossed 6% after a gap of 7 months and has stayed above 6% in Feb-22 also. In 4 out of the last 10 months, the CPI inflation has been above 6%, which is the RBI outer tolerance limit. Feb-22 also marked the 29th month in succession that retail inflation stayed above RBI median target of 4%. The tapering inflation trend between May-21 and Sep-21 reversed between Oct-21 and Feb-22, with a deep crude oil imprint.

Data Source: MOSPI

The most important trigger for higher headline inflation in Feb-22 was once food inflation; rising another 42 bps from 5.43% to 5.85%. In last 4 months, food inflation has scaled up by 492 basis points, despite robust Rabi arrivals expected. Food basket has a weightage of 45.86% in CPI inflation basket and hence punches above its weight on inflation impact.

Fuel inflation and transport inflation remained high but tapered further to 8.73% and 8.13% respectively. However, that is more because the government has not raised prices of petrol and diesel, despite Brent crude prices averaging above $110/bbl. By now, this crude spike would have offset the gains of lower excise and VAT on oil. The big concern in Feb-22 is that core inflation continues to remain sticky at 6.18%.

Rural food inflation powering overall inflation in Feb-22

In the last 1 year, rural inflation has played a significant role in pushing up food inflation and overall inflation. Rural inflation was sequentially up from 6.12% to 6.38%, driven by a sharp spike in rural food inflation; up from 5.18% to 5.87%. In fact, on a yoy basis, overall rural inflation is up from 4.19% to 6.38% while rural food inflation spiked from 2.89% to 5.87%.

What is specifically driving rural inflation. Rural inflation in meat & fish stands at 7.55%, oils & fats at 18.09%, spices at 6.24%, sugar & confectionary at 5.64%, clothing at 9.42%, footwear at 11.04%, fuel at 8.35%, transport at 7.26% and healthcare at 6.70%.

On the urban inflation front, vegetables inflated at 10%. In addition the inflation was elevated in commodities like oils & fats at 13.2%, meat & fish at 7.21%, clothing at 7.39%, footwear at 8.75%, fuel & lighting at 9.25%, health at 7.04%, and transport at 8.97%.

Core inflation stays above 6% for 5th month in a row

February 2022 marked the 5th successive month in which core inflation stayed above the 6% mark. Core inflation has stayed above 6% in 8 out of the last 12 months. The sharp spike in core inflation in Feb-22 can be attributed to supply side constraints as well as the downstream effect of a spike in oil, minerals, chemicals etc. Core inflation excludes food and fuel, which are considered more volatile. Hence tackling core inflation is a lot more complicated since it happens to be structural.

Month	Food Inflation (%)	Core Inflation (%)
Feb-21	3.87%	5.89%
Mar-21	4.94%	6.00%
Apr-21	1.96%	5.38%
May-21	5.01%	6.40%
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%	6.18%

 Data Source: MOSPI / Bloomberg

Indian government has taken steps to cut excise on petrol and diesel, but that is not going to be sufficient since oil prices are up 25% since the war started. The excise cut must have been offset by this sharp rally in crude prices. As per the latest report by Morgan Stanley, a 15% increase in the price of petrol and diesel was inevitable. This will impact core inflation through the downstream effect. Controlling core inflation is normally a trade-off between revenues and the larger goal of inflation control. For now, the government appears to have opted to control inflation, even at the cost of revenues.

How the food basket shaped up in Feb-22

The Feb-22 monetary policy toned down inflation expectations for FY23 to 4.5%. However, deputy governor, Dr. Michael Patra, is sceptical about such aggressive inflation targets. Let us focus on how some key food basket components moved in the last few months.

• Meat and fish inflation spiked to 7.45% in Feb-22, compared to 5.47% in Jan-22 and 4.58% in Dec-21. Egg Inflation also bounced to 4.15% in Feb-22 compared to 2.23% in Jan-22 and 1.48% in Dec-21.
•  Fruits inflation was absolutely flat at 2.26% in Feb-22, compared to 2.26% in Jan-22 and 3.54% in Dec-21. However, vegetable inflation spiked to 6.13% in Feb-22 compared to 5.19% in Jan-22 and (-2.99%) in Dec-21. Considering its 13.2% weightage in food basket, vegetables was a key driver of food inflation.
• Pulses inflation was again flat at 3.02% in Feb-22 compared to 3.02% in Jan-22 and 2.43% in Dec-21. Cereals inflation picked up sharply to 3.95% in Feb-22 compared to 3.39% in Jan-22 and 2.62% in Dec-21. Sugar inflation was flat at 5.41% in Feb-22 compared to 5.36% in Jan-22 and 5.58% in Dec-21.

The food basket saw a surge in inflation levels, triggered by cereals, milk and vegetables. Overall, protein products were subjected to high inflation.

Will the focus of RBI policy now shift to inflation?

The RBI fended off rate hikes in Feb-22 policy but may find it tougher in Apr-22. Regarding the FOMC meet, 25 bps rate hike is factored in but 50 bps rate hike could be negative. That will impact Indian monetary policy.

• Core inflation at 6.18% means the government will have to act quickly to regulate supply chain issues. The ongoing war between Russia and Ukraine has just queered the pitch as nearly $10 billion worth of trade is imperilled.
• With 85% dependence on imported fuel, Brent crude averaging above $110/bbl poses a real risk to inflation and the Indian rupee. The rupee has weakened to 76.6/$ and oil went as high as $139/bbl.
• A lot will depend on the Mar-22 Fed meet and the dot plot chart. However, the Fed is likely to hold on to its medium term rate targets.

When the US faces 7.90% retail inflation, India may be forgiven for 6.07% CPI inflation. But the message is that rate hikes have to happen; sooner rather than later. In the Indian context, it could happen as early as April 2022.