• 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.

  o    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.

  o    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

Outlook

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 prices.

• Easing of global supply chain pressures could gather steam with China showing inclination for gradually curbing Covid restrictions.

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.