CPI Inflation shocks the street at 7.79% for April 2022

13 May 2022 , 11:16 AM

Even before the inflation data was announced for April 2022, the Reuters consensus estimate had pegged India CPI inflation at 7.50%. The actual inflation number for April 2022 has come in at a multi-year high of 7.79%, showing intense price pressure. In fact, from a level of 4.35% in September 2021, the headline CPI inflation has rallied by 344 basis points over the last 7 months.

April 2022 marks the 31st successive month that retail inflation stayed above the RBI median target of 4%. This time, it was not just crude prices but even core inflation and food prices contributed in a big way. The war situation in Ukraine and supply chain constraints have added to inflation worries. To an extent, it looks like the spike was anticipated by the RBI, considering the urgent decision to hike repo rates last week.

Data Source: MOSPI

Food inflation was once again the villain of the inflation story. More pertinent, was the steady spike in rural food inflation. Food inflation for April 2022 spiked by another 70 bps from 7.68% to 8.38%. In the last 6 months, food inflation has scaled up more than 670 bps, despite the promise of robust Rabi arrivals. The food basket has a weightage of 45.86% in overall CPI inflation basket.

There was a sharp bounce back in fuel inflation and transport inflation; which had tapered in March 2022to 7.52% and 8.00% respectively. April 2022 saw the impact of petrol hikes and the downstream effect kicking in as fuel inflation spiked to 10.80% while transport inflation has also bounced to 10.91%.

Rural inflation continues to be a concern in April 2022 also

If one were to look at the sales numbers of FMCG companies in the March 2022 quarter, one major trend is the slowdown in rural sales. That is due to sharp spikes in rural inflation with negative impact on rural incomes and rural purchasing power. That argument is not just hypothetical, but now it is backed by rural inflation numbers too.

In last 1 year, rural inflation played a significant role in pushing up food inflation and overall inflation. Rural inflation was sequentially up from 7.66% to 8.38%, driven by rural food inflation; up from 8.04% to 8.50%. The other major drivers of rural food inflation were oils & fats at 18.38%, vegetables at 13.69%, spices at 11.19%, fuel at 11.03%, clothing & Footwear at 10.76%, personal care effects at 9.31%, prepared snacks at 7.25% and health at 7.03%.

Inflation growth has been less severe in urban areas compared to rural areas. On the urban front, vegetables inflated at 18.13%. In addition the inflation was elevated in commodities like oils & fats at 15.18%, spices at 9.28%, footwear 10.91%, fuel at 10.39%, transport at 12.10%, clothing at 7.95% and meat & fish at 6.57%.

Core inflation scales 8-year high of 7.24%

April 2022 marked the 7th successive month core inflation stayed above 6% and the first time in the last one year above 7%. Core inflation at 7.24%, is the highest since 2014. The 8-year high core inflation has been triggered by the downstream effect of a spike in oil, minerals and chemicals. Core inflation is more structural and hence stickier compared to food and fuel inflation that are cyclical. That makes core inflation tougher to manage.

Month	Food Inflation (%)	Core Inflation (%)
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%
Apr-22	8.38%	7.24%

Data Source: MOSPI / Bloomberg

Core inflation is driven by the downstream effect of commodity inflation and policymakers have limited influence. Controlling core inflation is generally a trade-off between revenues and the larger goal of inflation control. That is the Challenge for FY23, but we will come back to that later.

Tracking food basket components in April 2022

With food inflation spiking in urban and rural India, here is a quick look at how the food basket components behaved in April 2022.

– Meat and fish inflation tapered to 6.97% in April 2022 compared to 9.63% in March 2022 and 7.45% in February 2022. Egg Inflation tapered to 0.00% in April 2022 compared to 2.44% in March 2022 and 4.15% in February 2022.

– Fruits inflation came in at 4.99% in April 2022 compared to 2.54% in March 2022 and 2.26% in February 2022. Vegetable inflation also spiked to 15.41% in April 2022 compared to 11.64% in March 2022 and 6.13% in February 2022. Considering its 13.2% weightage in the food basket, vegetables are a major food inflation trigger.

– Pulses inflation was lower at 1.86% in April 2022 compared to 2.57% in March 2022 and 3.02% in January 2022. Cereals inflation picked up sharply to 5.96% in April 2022 compared to 4.93% in March 2022 and 3.95% in February 2022. Sugar inflation was slightly lower at 5.22% in April 2022.

Overall food inflation surge was triggered by cereals, oils & fats and vegetables. Inflation on protein products moderated in April 2022. The food inflation spike was more prominent in rural areas than in urban areas.

RBI is unlikely to relent on inflation control

In an unscheduled development, the RBI convened a special meeting of the MPC in early May 2022 and hiked repo rates by 40 basis points to curb inflation. In addition, it also hiked CRR by 50 bps to soak Rs87,000 crore of liquidity from financial markets. RBI has also hinted that inflation estimates may be revised higher in June policy with hints of more rate hikes.

– Core inflation at 7.24% means structural inflation is getting stickier by the day. Government must now act faster to regulate supply chain issues on priority basis.

– Brent has taken support at $100/bbl levels and is currently at $108/bbl. That is likely to keep pressure on inflation, considering India’s 85% dependence on imported crude.

– One big area of worry for the RBI would be the sharp spike in rural inflation in last few months as it impacts the more vulnerable sections of the Indian population.

With the US consumer inflation at 8.30% and Indian headline inflation at 7.79%, RBI is unlikely to focus on growth levers for now. It will be inflation control, first and foremost. The minimum the markets should be prepared for is reversal of the COVID rate cuts of 115 basis points. That means; another 75 bps of rate hikes on the anvil in India!