FOCUS: Inflation still a bugbear as core plays stubborn

Informist, Wednesday, Dec 14, 2022


By Aditya Saroha 


NEW DELHI – India can take heart from the latest retail inflation data that showed the headline number fell within the Reserve Bank of India's comfort band of 2-6% for the first time in 11 months. But peering into the fineprint shows it may still be early days to bet on a breakthrough in the central bank's battle against inflation, economists say.


For one, is the fall in the number real or just base play? And two, core inflation–which excludes the volatile elements of food and fuels–remains stubborn as ever, shrugging off the central bank's combat.


Data released Monday showed CPI inflation fell to 5.88% last month from 6.77% in October, mainly because of a favourable base and a sharp decline in prices of food items, especially vegetables. The index at 166.7 in November 2021 was 0.7% higher than a month ago.  


This high base effect will not be relevant in December, and this raises concern whether the fall in inflation is real and if it will be a lasting fall.


Food inflation fell to an 11-month low of 4.67% in November from 7.01% in October. On a month-on-month basis, the food index was down 0.9% in November. 


"That (vegetable prices) pushed the headline inflation lower by 0.45% m-o-m (month-on-month) non-seasonally adjusted, leading to a 0.1% contraction (in the headline number). That is, headline CPI index would have risen sequentially if not for this impact," ICICI Securities Primary Dealership said in a report. 


The 5.9% headline inflation print for November was sharply lower than an Informist poll estimate of 6.4%.


The trend, if it persists over the next few months, could temper the need for further rate hikes by the RBI, which has been tightening its monetary policy to bring inflation under control. However, one cannot count on the trend continuing, particularly given that food prices represent a rather volatile component of the inflation basket, economists said.


The food and beverages segment that constitutes about 46% of the total weight of the CPI basket fell 0.7% on month in November, dragged down by the vegetables index that declined by 8.3% sequentially. Vegetables account for 13% of the total food and beverages basket. 


The contraction came amidst a drop in temperatures and improved supplies after heavy rains seen in early October receded.


For the time being, inflation may be kept under check as the decline in food prices has continued in the first two weeks of December, economists said. Emkay Global said in a report that food inflation should provide further relief ahead, with a healthy winter harvest so far. 


Economists see inflation close to the latest print at about 6% in December. Should this hold true, CPI inflation will average 6.22% in Oct-Dec, significantly lower than the RBI estimate of 6.6%.


The central bank has estimated inflation will average 5.9% in Jan-Mar, 5.0% in Apr-Jun, and 5.4% in Jul-Sep. It sees inflation at 6.7% for the current financial year ending March.  


A disconcerting aspect of the latest inflation data is the stickiness in core inflation that excludes food and fuel, both viewed as volatile components. Core inflation, considered as a measure of durable price pressures, inched up to 6.1% in November from 6.0% in the previous month. Core inflation has hovered around the 6% mark since May 2021. 


Given that monetary policy primarily tackles core inflation, the latest data shows it may be premature to say that the rate hikes delivered by the RBI so far have started having an impact. Nor is it safe to rule out a resurgence of inflation if food prices were to rise again, as they typically do during summers.


Within core, services inflation in November rose to 5.3% in November from 5.2% a month ago, QuantEco Research said. "Complete reopening of the economy and a strong revival in demand for services continues to offer service providers an opportunity to hike prices and pass-on higher costs," it said. 


Within core inflation, prices of household goods & services, clothing and footwear, transport and communication, and personal care & effects remained higher.


Going forward, core inflation may remain sticky in the next few months as the recovery in the services sector gains momentum, economists said. Inflation in services forms about 80% of core CPI.  


"The RBI in its last policy raised concerns on inflation, especially with respect to persistence of core inflation," HDFC Bank said in a report.


"The RBI is likely to continue its battle to fight inflation, delivering a rate hike of 25 bps at its next policy meeting in Feb-23," it said.


ICICI Securities Primary Dealership, IDFC First Bank, QuantEco Research, and Barclays also expect a 25-bps-hike in February.


In a bid to tame inflation, the Monetary Policy Committee of the RBI has raised repo rate by 225 bps since May. Another hike of 25 bps will take the policy rate to 6.5%.   


In the monetary policy review last week, Governor Shaktikanta Das had cautioned that the war on inflation was far from over, and said the RBI will keep the focus of "Arjuna’s eyes" to rein in price rise.      


Stacking up the data on inflation, it's clear why he said that and why it may still be a while for clarity on the terminal rate, or the peak rate in the current cycle.   End



Edited by Ranjana Chauhan 


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