November consumer inflation falls sharply to 5.88%

13 Dec 2022 , 09:24 AM

On a sequential basis, CPI inflation has fallen by 89 basis points and the fall in the last 2 months has been to the tune of 153 basis points. But there are some specific reasons to celebrate. October may be the 38th month that CPI inflation has exceeded median target of 4%. However, for the first time since December 2021, the headline inflation has fallen below the outer RBI tolerance limit of 6%. RBI would now certainly have a more positive narrative to share with the government on inflation.

If you compare the November inflation to the peak level of 7.79% in April 2022, the inflation has tapered by 191 bps from the peak. In contrast, the WPI inflation has already fallen by more than 800 basis points between May and October 2022. However, CPI inflation normally follows the WPI inflation with a lag. In November 2022, Food inflation fell sharply by 234 basis points from 7.01% to 4.67%. Food inflation has fallen 393 bps in last 2 months. One worry could be that core inflation bounced back to around 6%, offsetting the impact of food and fuel prices. With the base rising from November 2021 onwards, there is scope for further tapering of CPI inflation in the coming months; assuming supply chains don’t put too much pressure on prices.

Data Source: MOSPI

One of the downsides of lower than expected Kharif output is the spike in cereals inflation. For November, cereals inflation stands at 12.96%, with rural cereals inflation much higher at 13.61%. On the positive side, late rains have ensured full reservoirs, which will boost Rabi output. That is already evident from the 25% better wheat sowing acreage this Rabi season.

Rural inflation is the real pain point for India

Rural inflation continues to feel pressure on multiple fronts. On a MOM basis, the rural food inflation fell from 7.30% to 5.22%. Even the headline rural inflation has fallen from 6.98% to 6.09%. However, in the monthly inflation basket mix, rural inflation is much higher than urban inflation, putting pressure on rural purchasing power.

Out of the headline inflation of 5.88% for November 2022, rural inflation was 6.09% while urban India was 5.68%. If you look at overall food inflation at 4.67%, rural food inflation was 5.22% while urban food inflation was 3.69%. We spoke about rural cereal inflation being much higher than urban cereal inflation. But there are more instances. In the food basket, rural inflation is sharply higher than urban inflation for eggs, fruits and spices.

However, the rural basket was not just about food but also about the non-food items. Rural fuel inflation is lower but transport inflation is higher. In rural India, the clothing inflation at 9.86% is higher than 8.93% for urban India. Rural inflation is, however, lower than urban inflation in products like footwear, healthcare, recreation and education.

Core inflation back at 6% on supply chain constraints

Core inflation (the inflation excluding food and fuel), which had fallen to 5.9% in October, has bounced back to 6.0% in November. Core inflation could actually have been much higher but for weak rural inflation, which is an outcome of weak rural demand. As income levels have suffered and rural inflation continues to be high, it impacts rural demand. That means, if rural income levels bounce back, spike in core inflation could be quite sharp.

The structural nature of core inflation makes it tougher to manage and regulate and that is the key challenge. The last Economic Survey ahead of the Union Budget 2022 underlined the need to focus on core inflation above headline inflation. The target has always been to keep Core inflation around 4%, but core inflation has stayed above 6% for 8 out of the last 13 months, creating a concern at the policy level.

Month	Food Inflation (%)	Core Inflation (%)
Nov-21	1.87%	6.08%
Dec-21	4.05%	6.01%
Jan-22	5.43%	5.95%
Feb-22	5.85%	5.99%
Mar-22	7.68%	6.32%
Apr-22	8.38%	6.97%
May-22	7.97%	6.08%
Jun-22	7.75%	5.96%
Jul-22	6.75%	6.01%
Aug-22	7.62%	5.90%
Sep-22	8.60%	6.10%
Oct-22	7.01%	5.90%
Nov-22	4.67%	6.00%

Data Source: Ministry of Finance Estimates

In its latest issue of World Economic Outlook (WEO), the International Monetary Fund (IMF) had highlighted Indian policy ambiguity in handling core inflation. The IMF observed that India’s fiscal policy had often been at cross purposes with monetary policy. Controlling core inflation is a trade-off between government revenues and the larger goal of inflation control. Any battle against inflation has a fiscal cost in the form of duty cuts, and a focus on government revenues spikes inflation. That is where the government is in a dilemma.

How inflation impacted the food basket in November 2022

Here are some of the major highlights of the food basket story for the month.

• Let us first look at the high protein and high vitamin intake. Meat and fish inflation was higher at 3.87% while eggs bounced back from negative to 4.86%. Oils and fats were subdued at -0.63%. However, inflation in milk and milk products remained higher at 8.16% for November 2022.
• Fruits inflation tapered further to 2.62% even as vegetable inflation dipped into negative at -8.08% in November 2022. Among other products, pulses inflation bounced to 3.15%, but the crux of the food inflation problems appears to be stemming from cereals inflation at 12.96%. Foodgrain output has been hit badly by erratic monsoons and unless Rabi crop comes into the market, the pressure is likely to sustain on cereals prices.

Overall, cereals, milk and vegetables remain the key food inflation drivers. However, it was the sharp fall in vegetables inflation into negative territory that brought down food inflation so sharply in November 2022. Shorn of the vegetables effect, effective fall in food inflation in November may not be that impressive.

Where does the RBI go from here?

Now the RBI has two key data points. For November 2022, the headline inflation has fallen sharply to 5.88%. At the same time, the IIP growth for October dipped to -4.0%, putting pressure on the overall GDP for the next two quarters. Inflation may have come down sharply but growth is clearly suffering. It is not entirely due to RBI policy, since global headwinds have also contributed to the fall in IIP. However, it is time for the RBI to act on the variable they control and make money cheaper for Indian business. The message is that inflation is coming down in a decisive manner. RBI has rightly maintained an anti-inflation stance since April 2022. For a growth-dependent economy like India, this could be the right time to shift gears and focus on growth once again; as Jayanth Varma suggests.

RBI must now change the narrative and talk less about inflation and more about growth. RBI has done its bit for toning down inflation expectations and ensuring price stability. Rest of the adjustment process will be on auto mode. However, the current situation of high input inflation, high interest rates and tight liquidity is hardly favourable if India dreams of being the fastest growing large economy in FY23. RBI will have to lend a helping hand in the form of easy liquidity and lower cost of funds.