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DEC-21 INFLATION: SEQUENTIAL MODERATION HIDES UPSIDE RISKS

17 Jan 2022

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KEY TAKEAWAYS

  • Retail and wholesale rate of inflation diverged in Dec-21 with CPI inflation accelerating by 69 bps to 5.59% YoY while WPI inflation moderating by 67 bps to 13.56%.
  • Despite the divergence on annualized basis, the sequential print in both CPI and WPI showed a similar contraction by 0.36% MoM and 0.35% MoM respectively.
  • The sequential decline in food and beverages inflation has clearly supported the moderation in both CPI and WPI inflation.
  • However, upside risks persist on account of incomplete pass-through of telecom tariffs, persistence of elevated international commodity prices, expected demand pickup due to progress on vaccination, and temporary disruption from Omicron.
  • As such, we continue to expect CPI inflation to remain firm in the near term with a strong likelihood of Q4 FY22 average number printing above RBI’s estimate of 5.7%.
  • Overall, we continue to maintain our FY22 CPI inflation forecast at 5.5% given the moderate trajectory in the early part of the fiscal year and the continuing comfort on food inflation.

On headline basis, retail and wholesale rate of inflation diverged in Dec-21. While CPI inflation accelerated sharply by 69 bps to 5.59% YoY, WPI inflation moderated by 67 bps to 13.56% YoY. Despite the divergence on annualized basis, the sequential print in both CPI and WPI showed a similar contraction by 0.36% MoM and 0.35% MoM respectively.

CPI inflation: Headline gets close to upper band of policy tolerance threshold

India’s CPI inflation accelerated to a six-month high of 5.59% YoY in Dec-21 from 4.91% in Nov-21. While headline inflation continues to stay within the policy target band, with the latest print, it has now got closer to the upper threshold of 6%.

Despite a reduction in sequential prices pressures versus previous month, the upside in headline print underlined the unfavorable base at play. To put this in context, incrementally CPI index fell by 0.36% MoM in Dec-21 despite the annualized rate of inflation rising by 70 bps.

Key highlights:
  • The sequential decline was led by the Food & Beverages index that dipped by 0.88% MoM, following a 1.19% increase in Nov-21. Leading this sequential decline in Dec-21 were Vegetables (-5.4%), Meat & Fish (-1.4%), Oils & Fats (-1.3%), Sugar (-1.1%), and Fruits (-1.0%). While that’s comforting to note, the overall monthly decline appears to be somewhat weaker than the 1.0-1.5% decline usually seen on account of winter seasonality in December.
  • The other two sources of sequential decline in prices were Pan, Tobacco & Intoxicants (-0.2% MoM) and Housing (-0.5% MoM) indices. While it is difficult to ascribe a reason for the former, the latter is a bi-annual seasonal development, and hence not a surprise.
  • Fuel & Light index rose, led by Coal (1.3% MoM), Kerosene (1.2% MoM), Dung Cake (1.1%), and Firewood & Chips (0.4% MoM). Meanwhile, fuel items in the Miscellaneous index i.e., Petrol and Diesel fell by 1.9% MoM and 2.7% MoM respectively, reflecting spill over impact of the reduction in petroleum taxes by the government during Nov-21.
  • Among other movers, the index of Clothing & Footwear once again posted a strong momentum of 0.7%MoM, underscoring the ability of producers to charge higher price for goods amidst ramp-up in festive demand and increased retail mobility.
  • Telephone charges saw a jump following upward revision in tariffs by telecom companies. However, the 4.8% MoM increase captured by the respective CPI sub index is much lower than the 20%+ actual increase in tariffs by key telecom companies. In our opinion, this leaves the door open for lagged adjustment in the CPI in the coming month(s).
  • Core inflation (i.e., CPI ex Food & Beverages and Fuel & Light indices) increased by 0.2% MoM in Dec-21 vs. 0.4% MoM in Nov-21. While the annualized rate of core inflation moderated a tad, we note that it has averaged around 6.2% in last three months. We expect core inflation to remain sticky as several sectors such as autos, electronics, textiles among others are seeing pass-through of higher inputs costs in a calibrated manner, which could continue into 2022 along with persistent supply disruptions.

WPI inflation: Decelerates from record high levels
WPI inflation moderated from its record high level of 14.23%YoY in Nov-21 to 13.56% in Dec-21. Sequentially, the headline index fell by 0.35% MoM in Dec-21, marking its first contraction in 19-months.
  • Primary food prices fell by 1.07% MoM in Dec-21, led by Vegetables and Eggs, Meat & Fish. In addition, manufacturing indices for food and beverages also contracted by 0.25% MoM and 0.24% respectively.
  • Fuel & Power index fell by 2.66% MoM in Dec-21, marking its first contraction in eight months. The down move was led by fall in petrol and diesel prices along with primary crude petroleum & natural gas. This reflects the sharp fall in price of India Crude Basket to USD 73 pb in Dec-21 from USD 81 pb in Nov-21.
  • Core inflation (non-food manufacturing inflation)) moderated to 11.00% YoY in Dec-21 from 12.30% in Nov-21. While the monthly sequential momentum decelerated to 0.31% MoM from 1.24% in Nov-21, it nevertheless remains on the higher side, thereby reflecting persistence of pass-through pressures from input prices.
Outlook
The common thread emerging from both CPI and WPI inflation is the sequential moderation in price pressure, predominantly led by seasonal disinflation in food & beverages. Government policy interventions in case of edible oil and pulses along with reduction in petroleum taxes have also been somewhat supportive of an overall benign food inflation outturn. Moreover, healthy rabi sowing bodes well for food inflation in the coming months.

However, significant inflation risks continue to persist.
  • CPI inflation is yet to fully represent the complete impact of sharp hike in telecom tariffs in Dec-21.
  • As severe tail risks on account of Omicron have receded, global commodity prices have firmed up sharply in Jan-22, with price of India Crude Basket averaging at USD 80 pb vis-à-vis USD 73 pb in Dec-21. This will result in a persistence in input price pressures.
  • India has currently vaccinated ~65% and ~46% of its total population with first and second dose of vaccine. Continued progress on this front coupled with recovery in personal mobility (barring the temporary disruption on account of Omicron) will continue to support pent-up/revenge demand and could keep core inflation elevated.
  • In last 3-weeks, states have reimposed lockdowns to curb the rapid spread of Omicron. While the restrictions are moderate and could turn out to be of shorter duration compared to that during second wave, there could be a mild spillover on inflation due to temporary supply disruptions.
As such, we continue to expect CPI inflation to remain firm in the near term with likelihood of Q4 FY22 average number printing above RBI’s estimate of 5.7%. Overall, we continue to maintain our FY22 CPI inflation forecast at 5.5% with moderate downside risks.

                                                              Annexure 

Table 1: Key highlights of CPI inflation

Chart 1: Core inflation pressures continue to persist