- Within CPI, momentum of Food and beverages
continued to remain firm for the third month in a row. Sequential momentum rose
even further to 0.96%MoM in Oct-22, compared to 0.85% and 0.74% over Sep-22 and
Aug-22. The upside was led by a strong build-up in price of Cereals (1.04%MoM),
Vegetables (+4.12%MoM) and Spices (1.27%MoM).
- The unseasonal rainfall in early part of Oct-22
is likely to have adversely impacted output as well as delivery supplies of
vegetables. In addition, less than normal area sown under paddy and
expectations of a lower 2022-23 output, have kept price pressures on rice and
its derivatives intact over the last three months. This comes amidst continuing
pressure on wheat prices, aggravated by the onset of the festive season as well
as extension of the PMGKY (free foodgrain scheme for poor) for another 3 months
up to Dec-22.
- With milk prices having been revised multiple
times in the current fiscal, the annualised inflation of milk and its products
rose to 9.2% in the period Apr-Oct’22.
- Food prices, on the wholesale side too
witnessed a strong momentum of 2.03%MoM compared to 0.11% in the previous
month. The upside was single-handedly driven by vegetables prices, with
household staples of Onions, Tomatoes registering sharp uptick in prices.
CPI Inflation: Other key highlights
- Consolidated fuel index rose by 0.41% MoM in
Oct-22, up from 0.29% in Sep-22. The increased momentum in prices was led by
Charcoal, Dung Cake, Coal, and Electricity even as retail price of petrol and
diesel remained broadly unchanged.
- Core inflation (CPI ex indices of Food &
Beverages, Fuel & Light and Pan Tobacco and Intoxicants) remained sticky at
6.2% YoY, with 0.6% MoM jump in sequential momentum. Incremental price
pressures were on account of Housing, Personal Care & Effects.
Unexpectedly, housing price momentum rose to
0.94%MoM in Oct-22 – the highest in last 6 months compared to 0.30% previously,
given the pickup in demand in some of the cities.
While price of both gold and silver corrected
globally in Oct-22, the depreciation in Rupee over the same period more than
offset the price decline.
Chart 1: Base impact
leads CPI inflation to ease to 6.77% YoY in Oct-22
WPI Inflation: Other key highlights
- Sequentially, both Fuel & power and Manufacturing
saw a contraction, of 1.65%MoM and 0.42%MoM respectively.
- Across the board decline in price of mineral
oils, led by Furnace oil (-5.3%MoM), Kerosene (-5.0%MoM), ATF (-4.6%MoM) and
Diesel (-3.9%MoM) reflected the recent correction in global crude oil prices.
- Within manufacturing, price momentum was lower
in case of fabricated metal products (-2.0%MoM), Textiles (-1.1%MoM), Other
non-metallic mineral products (-1.2%MoM) among others. As such, Core WPI
(non-food manufacturing) inflation in tandem eased to a 22-month low of
4.68%YoY compared to 7.03% a month ago.
- Overall, WPI index sequentially rose by a
modest 0.3%MoM after remaining in contraction over the previous three months.
Thus, the comfort on headline stemmed in large part from a favourable base.
Chart 2: Sharp
deceleration in WPI inflation from its recent peak
While moderation in headline retail inflation
in Sep-22 is welcome, there are uncomforting factors that continue to bother -
- The broad-based increase in food prices,
especially cereals, could keep sequential momentum somewhat elevated in the
near term. Some respite can be expected from Dec-22/Jan-23 onwards as the
festive season ends and winter seasonality in perishables kicks in
- After declining by 3.9% and 0.2% over months of
Sep-22 and Oct-22, CRB index has once again inched up in Nov-22. While the
pass-through of softening global commodity prices, especially crude oil is
likely to be more pronounced on WPI inflation (as seen in latest readings), the
pass-through to CPI inflation is likely to remain partial and drawn out.
- Some of the recent electricity tariff hikes at
the state level are starting to get reflected in data in a calibrated manner.
- Rupee weakness could impart a degree of
imported inflation upside
- The bounce-back in demand for services post Covid
is seen in sharp sequential price pressure in some items such as monthly
maintenance charges, air fares, porter charges among others. This could keep
core inflation somewhat sticky.
Having said so, we could see
some offsetting impact coming from –
- The anticipated slowdown in global economic
growth in 2023 and its disinflationary impact on international commodity
- Easing of global supply chain pressures could
gather steam with China showing inclination for gradually curbing Covid
As such, we continue to maintain our FY23 CPI
inflation forecast of 6.7%. On a quarterly basis, we expect CPI inflation to continue
to moderate over Q3 and Q4 FY23, reverting within RBI’s inflation target band
in the last quarter of the fiscal year.
From monetary policy perspective, we expect the
MPC to hike rates further by 35-40 bps in the upcoming policy review in Dec-22,
and to opt for a pause thereafter.