Aug-22 CPI Inflation: Food prices on watch

15 Sep 2022

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KEY TAKEAWAYS

  • India CPI inflation in Aug-22 rose slightly in line with expectations to 7.0%YoY from a 5 month low of 6.71% in Jul-22. This marked the eighth consecutive month of CPI inflation remaining above RBI’s upper threshold of 6.0%.
  • On sequential basis, CPI momentum in Aug-22 was largely in line with recent trend at 0.52%MoM compared to 0.49% over Jun-Jul-22.
  • However, compared to previous month, there was a significant change in the drivers of the sequential momentum; with Food & beverages seeing a strong build-up and Fuel prices offering respite.
  • WPI inflation eased to an 11-month low of 12.41%YoY in Aug-22 from 13.93% in Jul-22. The downside was led primarily by fuel and other commodity prices. On sequential basis, prices contracted for the second consecutive month.
  • The risks to our FY23 CPI inflation estimate of 6.7% appear to be somewhat well balanced at the current juncture.
  • Supportive factors include a largely good run in Southwest monsoon, moderation in global commodity prices along with government’s administrative measures including the recent ban on exports of broken rice and imposition of 20% tax on export of non-basmati rice.
  • On the other hand, uneven distribution of rainfall, Rupee depreciation and pent-up demand for goods and services could add to upside pressures, along with the hike in GST rates on select items and electricity tariffs that are yet to reflect completely.

India CPI inflation rose in line with expectations in Aug-22, to 7.0%YoY from a 5-month low of 6.71% in Jul-22 (Reuters consensus: 6.9%). This marked the eighth consecutive month of CPI inflation remaining above RBI’s upper threshold of inflation band of 6.0%.

Key highlights of CPI inflation

  • On a sequential basis, CPI momentum in Aug-22 was largely in line with recent trend at 0.52%MoM compared to an average of 0.49% over Jun-Jul-22.
  • However, compared to previous month, there was significant divergence in the drivers of sequential momentum.
  • Momentum of Food and beverages saw a sizeable jump to 0.74%MoM in Aug-22 compared to a subdued 0.06% in Jul-22. The upside was led by a strong buildup in price of Cereals (+2.43%MoM), Vegetables (+2.47%MoM), Spices (+1.89%MoM) and Pulses (+1.70%). This could be attributed to uneven distribution of rainfall that has particularly weighed on rice acreage, GST hikes on select food items, monsoon related seasonality in case of vegetables and global spillovers. The upward price pressure more than offset the moderation seen in Meat & fish (-3.1%MoM), Eggs (-3.42%MoM) and Oils & fats (-1.74%MoM) in the month.
  • After registering a strong build-up of 2.04%MoM in Jul-22, momentum in Fuel and light contracted by 0.45% in Aug-22, led primarily by PDS Kerosene (-7.83%MoM) along with Coke and Charcoal.
  • The sequential momentum in core inflation (CPI ex indices of Food & Beverages, Fuel & Light) eased marginally to 0.51% MoM in Aug-22 from 0.59% in Jul-22. The annualized rate of core inflation rose to 6.11% YoY in Aug-22 vis-à-vis 6.04% in Jul-22, with strong price pressures seen in case of Clothing & footwear, Personal care and effects, Housing and Household goods & services.

Key highlights of WPI inflation
WPI inflation eased to an 11-month low of 12.41%YoY in Aug-22 from 13.93% in Jul-22. The downside was led primarily by fuel and other commodity prices. On sequential basis, prices contracted for the second consecutive month, by -0.46% in Aug-22 compared to -1.03% in Jul-22.

  • At a granular level, consolidated food saw a strong sequential momentum, at 0.9% MoM owing to rise in price of rice, pulses, wheat, and fruits, compared to a contraction of -2.2% in the previous month.

  • On the other hand, fuel and power registered a sharp decline of -4.83%MoM mainly on account of a fall in mineral oils (-7.8%MoM). At a granular level, with the exception of lubricant oils that grew by 6.5%MoM, all the other major fuel components registered a price contraction on a sequential basis. Of these, prominent decline was registered for Kerosene (-13.7%MoM), ATF (-12.5%MoM) and Furnace oil (-12.3%MoM).

  • Index heavy-weight manufacturing saw a subdued price increase by 0.07%MoM, in contrast with the contraction seen in previous two months. The strong upward adjustment in price of Non-metallic mineral products, wearing apparels, electrical equipment was offset by correction seen in case of Rubber, Furniture and Textiles.

Outlook

The risks to our FY23 CPI inflation estimate of 6.7% appear to be somewhat well balanced at the current juncture. 

Supportive factors for CPI outlook include – 

  • A good run in Southwest monsoon, with cumulative rainfall upto 13 Sept-22 clocking a surplus of 6% over LPA (long period average).
  • Moderation in global commodity prices to the tune of ~9% since the peak in early Jun-22, as measured by Reuters CRB Index.
  • Administrative measures of the Government including the recent ban on exports of broken rice and imposition of 20% tax on export of non-basmati rice.

On the other hand,

  • Despite the headline outperformance of rainfall, geographical distribution has been uneven weighing on rice acreage sown this year. This has led to an upward pressure on domestic prices, though expected to be contained by Government action on curtaining rice exports.
  • Rupee weakness could impart a degree of imported inflation upside
  • Removal of all Covid related restrictions along with the high vaccination coverage has led to a strong revival of contact-intensive services along with non-dissipating pent-up demand for goods. This could keep pressure on core inflation intact.
  • Impact of hike in GST rates on some items of mass consumption along with hike in electricity tariffs by state discoms remains yet to be fully captured.  

Annexure

Table 1: Key highlights of CPI inflation 

Chart 1: WPI inflation eased to an 11-month low in Aug-22