Mar-22 retail inflation spikes to 6.95% on rural inflation thrust

13 Apr 2022 , 08:35 AM

Inflation has been rising since Sep-21, but retail inflation has now been above 6% for 3 months in a row. Between Sep-21 and Mar-22, CPI inflation increased by 260 bps from 4.35% to 6.95%. With petrol and diesel hikes also getting factored in Mar-22, the impact could be sharper on the transport and logistics inflation in Apr-22.

In Jan-22, CPI inflation crossed 6% after a gap of 7 months and has since stayed above 6%. In 5 out of the last 11 months, CPI inflation was above 6%, which is the RBI outer tolerance limit. However, Mar-22 also marks the 30th successive month that retail inflation stayed above the RBI median target of 4%. Crude prices ensured that Mar-22 inflation was sharply higher, despite the advantage of high base effect.

Data Source: MOSPI

Food inflation was once again the villain of the inflation piece, but what was more pertinent was the sudden spike in rural inflation. Food inflation for Mar-22 spiked by another 183 bps from 5.85% to 7.68%. In last 5 months, food inflation has scaled up more than 600 bps, despite promises of robust Rabi arrivals. Food basket has a weightage of 45.86% in CPI inflation basket and literally drives consumer inflation.

Fuel inflation and transport inflation tapered further to 7.52% and 8.00% respectively. However, March only saw part of the petrol and diesel price hikes. With fuel prices at record highs, the apprehension is that inflation number could trend still higher once the full impact of transport and logistics costs are factored in. That impact will be visible in Apr-22 inflation.

Surge in rural inflation in Mar-22

It is not often that rural inflation drives headline inflation but that is the story in Mar-22. In last 1 year, rural inflation played a significant role in pushing up food inflation and overall inflation. Rural inflation was sequentially up from 6.38% to 7.66%, driven by rural food inflation; up from 5.81% to 8.04%. Overall rural inflation is up from 4.61% to 7.66% yoy while rural food inflation spiked from 3.94% to 8.04%. What is driving this phenomenon?

Rural inflation in meat & fish stands at 9.82%, oils & fats at 20.75%, spices at 8.96%, vegetables at 10.57%, prepared snacks at 6.60%, clothing at 9.00%, footwear at 12.18%, fuel at 8.27%, transport at 7.07%. personal care products at 9.34% and healthcare at 6.93%.

Inflation has been relatively severe in urban areas compared to rural areas, but the effect is still there. On the urban front, vegetables inflated at 10%. In addition the inflation was elevated in commodities like oils & fats at 13.37%, meat & fish at 9.27%, oils & fats 15.15%, footwear 9.95%, fuel & lighting at 6.27%, health at 7.20%, and transport at 8.82%.

Core inflation breaches 6.5% raising structural risks

March 2022 marked the 6th successive month core inflation stayed above 6%. The sharp spike in core inflation in Mar-22 can be attributed to supply side constraints caused by the Ukraine war and the downstream effects of a spike in oil, minerals, chemicals etc. Core inflation excludes food and fuel, which are more volatile. Tackling core inflation is more complicated and that risk is visible now.

Month	Food Inflation (%)	Core Inflation (%)
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%	6.22%
Mar-22	7.68%	6.53%

  Data Source: MOSPI / Bloomberg

Amidst rising crude prices, the Indian government first made OMCs bear the crude hike and then increased prices in a graded manner. However, that can only help up to a point. Controlling core inflation is a trade-off between revenues and the larger goal of inflation control. That is the dilemma the government must deal with in the new fiscal year FY23.

Tracking food basket components in Mar-22

The Apr-22 monetary policy was more rational in raising FY23 inflation expectations by 120 bps from 4.5% to 5.7%. Here is how the food basket components moved in Mar-22.

• Meat and fish inflation spiked to 9.63% in Mar-22, compared to 7.45% in Feb-22 and 5.47% in Jan-22. Egg Inflation tapered to 2.44% in Mar-22 compared to 4.15% in Feb-22 and 2.23% in Jan-22.
• Fruits inflation was at 2.54% for Mar-22 compared to 2.26% in Feb-22 and 2.27% in Jan-22. However, vegetable inflation spiked to 11.64% in Mar-22 compared to 6.13% in Feb-22 and 5.19% in Jan-22. Considering its 13.2% weightage in the food basket, vegetables became a food inflation booster.
• Pulses inflation was lower at 2.57% in Mar-22 compared to 3.02% in Feb-22 and 3.03% in Jan-22. Cereals inflation picked up sharply to 4.93% in Mar-22 compared to 3.95% in Feb-22 and 3.39% in Jan-22. Sugar inflation was flat at 5.51% in Mar-22 compared to 5.41% in Feb-22 and 5.36% in Jan-22.

Overall food inflation saw a surge, triggered by cereals, milk and vegetables. Most protein products were subjected to high inflation. The inflation spike was more prominent in rural areas than in urban areas.

It is high time, RBI starts thinking “Inflation Control”

The RBI fended off rate hikes in Apr-22 policy on the grounds of growth but the road is going to be tougher from here on. The US Fed has hiked rates by 25 bps in March and plans another 50 bps rate hike in May. Overall rates are expected to be close to 2.25% by end of 2022. The longer RBI maintains its dovish stance, the more it risks monetary divergence.

• Core inflation at 6.53% means that structural inflation is already here and is getting stickier by the day. Government must now act faster to regulate supply chain issues.
• Brent may have tapered back to below $100/bbl levels, but OPEC supplies are still elusive. With 85% dependence on imported fuel, direct and indirect risks are huge.
• Fed has made it stand clear that it is going to fight inflation with rate hikes and liquidity tightening. The onus is on the RBI to crystallize its stance.

When the US consumer inflation at 8.50% and India retail inflation at 6.95%, controlling rampant consumer inflation is going to be the theme of global monetary policy. It remains to be seen, when RBI also jumps on the bandwagon.