Overview

India’s inflation at retail and wholesale level diverged in Jan-23 with the CPI print reversing its downward trend and rising to 6.52% YoY (3-month high) while WPI slightly eased to 4.73% YoY (24-month low). More importantly:

• Notwithstanding the divergence at headline level, both inflation metrics depicted a rising sequential momentum, albeit with a significant difference in magnitude – while CPI rose by a significant 0.46% on MoM basis, WPI posted a relatively smaller increase of 0.13% MoM over the previous month.

Key highlights of CPI inflation

• The increase in CPI index marks the steepest sequential momentum seen in the month of January compared to the series average of -0.17% MoM before the latest print. Typically, the headline inflation witnesses a seasonal sequential decline in the month of January due to the benign prices of perishable food items.

• Food and Beverages index rose unexpectedly by 0.45% MoM in Jan-23 vs. the series average of -0.76% MoM usually seen in January. The upturn was led by Cereals (2.60% MoM), Eggs (2.26% MoM), Spices (1.56% MoM), and Meat & Fish (0.81% MoM). On the other hand, price pressures were seen easing in case of Vegetables (-3.75% MoM), Edible Oils (-0.64% MoM), and Sugar (-0.57% MoM).

• Acceleration in food inflation was driven by non-perishables, which rose to over a 9-year high of 9.5% YoY in Jan-23, with prices of Spices, Cereals, Milk, and Eggs continuing to march ahead at an elevated pace. However, with healthy rabi sowing and a normal monsoon assumed in CY23 along with expected steps from government to cool down any spurt in food prices, upside risk to food inflation could get neutralized.

• The jump in CPI was led by the sub-indices of Housing (0.82% MoM) and Miscellaneous (0.47% MoM). Within Miscellaneous index, the upsurge was led by Personal Care and Effects (10-month high of 1.59% MoM), Health (0.66% MoM), and Household Goods and Services (0.44% MoM). On annualized basis, this pushed core inflation further(CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous) to 6.5% YoY in Jan-23 from 6.3% YoY in Dec-22. Clearly, heightened core inflation is one of the key concerns of policy makers at this stage.

• Consolidated fuel prices remained unchanged on both sequential (0.0% MoM) as well as annualized basis (8.5% YoY).

Key highlights of WPI inflation

• WPI inflation moderated to 4.73% YoY in Jan-23 from 4.95%YoY in Dec-22 on account of favorable statistical base, even as the index rose sequentially, marking its largest monthly rise in 3-months.

• The incremental gain in Jan-23 was led predominantly by the Consolidated Food & Beverages index that rose by 0.59% MoM.

• Offering comfort, the Consolidated Fuel index declined by 1.34% MoM.

• Core WPI (WPI ex indices of Primary: Food, Mfg: Food, Mfg: Beverages, Fuel & Power, and Primary: Crude Petroleum & Natural Gas) moderated to a 27-month low of 2.62% YoY in Jan-23 from 3.15% YoY in Dec-22.

Outlook

While favourable statistical base effect helped WPI inflation drift lower in Jan-23, both inflation indices registered a sequential rise driven by surging prices of food and services at wholesale and retail levels. Having said so, the divergence in inflation at retail and wholesale level continues to persist, and in fact widened in Jan-23. Although WPI inflation continued its descent, CPI inflation rose to a 3-month high of 6.52% YoY. The divergence between them manifests (i) relatively strong linkage of WPI basket to softening global commodity prices, and (ii) dominance of services (non-tradables) in Core CPI basket. While the former has been on a correction path since mid-2022, pick-up in services activity has enabled an acceleration in prices and has been responsible for a stickiness in core CPI inflation.

However, there is also silver lining. Juxtaposed with lower commodity prices vis-à-vis average levels in 2022, expected moderation in domestic growth impulses, assumption of a normal monsoon in CY23, and a healthy rabi sowing (cultivation ended with 3.3% increase in acreage over the previous sowing season), one is hopeful of food price pressure easing, allowing for a gradual downward trajectory in CPI inflation In FY24. As such, we maintain our FY24 CPI inflation projection of 5.3%.

However, the steep upward surprise in Jan-23 CPI inflation data could push Q4 FY23 CPI inflation towards 6.0%, higher than RBI’s projection of 5.6%. In addition, it could potentially result in full year inflation averaging at 6.7%, i.e., 20 bps higher than Acuite and RBI’s estimate of 6.5%. 

From monetary policy perspective, the likelihood of a breach of inflation targeting band in Q4 FY23 would continue to impart a sense of vigil and hawkishness in RBI MPC. As such, we maintain our call of a 25 bps rate hike in the Apr-23 policy review. It is also likely that we need to wait longer for the much awaited change in stance in monetary policy from “withdrawal of accommodation” to “neutral”. After April, the MPC could choose to leave the door open for incremental rate hikes by turning data dependent.

Table 1: Key highlights of CPI inflation

Chart 1: CPI and WPI inflation depicted a divergent trend at headline level in Jan-23