Leave a message  call logo +91 99698 98000

Sep-22 CPI Inflation: Is the worst behind?

15 Oct 2022

Back

KEY TAKEAWAYS

  • India retail and wholesale inflation showed a divergent trend in Sep-22. While CPI inflation inched up to a 5-month high of 7.41% YoY (from 7.00% in Aug-22), WPI inflation eased to an 18-month low of 10.70% YoY (from 12.41% in Aug-22).
  • On annualized basis, the increase in CPI inflation was led by food & beverages, while the deceleration in WPI inflation was broad based involving fuel and manufactured goods.
  • The ongoing disinflation in most international commodity prices is getting captured by WPI inflation – if the current trend persists, then WPI inflation could briefly touch negative territory in Q1 FY24.
  • The makes us hopeful of expecting a decelerating trend in CPI inflation in H2 FY23 and beyond with support from gradual easing of global supply chain disruptions, a normal monsoon outturn, and imposition of price and quantity control measures by the government for select food items.
  • However, depreciation in rupee, lower acreage in case of paddy and pulses, erratic rainfall in Sep-Oct’22, further extension of PMGKY, and a complete reflection of changes in electricity prices could impart upside risks to inflation levels.
  • Overall, we believe risks surrounding our FY23 CPI inflation forecast of 6.7% to be neutral.

India’s retail and wholesale inflation showed a divergent trend in Sep-22. While CPI inflation inched up to a 5-month high of 7.41% YoY (from 7.00% in Aug-22), WPI inflation eased to an 18-month low of 10.70% YoY (from 12.41% in Aug-22). Notwithstanding the substantial drop of 593 bps in WPI inflation since its peak in May-22, CPI inflation has averaged close to 7% mark in the last 8-months. More importantly, since it has stayed well above the policy threshold of 6% for three consecutive quarters now, the inflation targeting mandate would for the first time trigger a formal explanation (along with steps for course correction) from the central bank to the central government.  


Key highlights of CPI inflation

  • On sequential basis, CPI momentum firmed up in Sep-22 to 0.57% MoM, up from 0.52% in Aug-22 and 0.18% in Sep-21.
  • Momentum of Food and Beverages rose to 0.85% MoM in Sep-22 from 0.74% in Aug-22 and 0.06% in Sep-21. The upside was led by persistence of sequential price pressures in case of Vegetables (+2.62% MoM), Cereals (+2.00% MoM), Spices (+1.91% MoM), and Milk (+0.95% MoM), all of which saw a similar increase in the previous month. In addition, fresh build-up of price pressures was seen in case of Meat & Fish (+1.31% MoM) and Pulses (1.14% MoM). 
  • The near broad based nature of sequential price pressures in case of food reflects the impact of (i) lingering of wheat inflation due to a combination of a severe heat wave at the end of FY22/start of FY23 and global disruptions on account of Russia-Ukraine war, (ii) lower sowing and lower output in case of paddy and pulses in the current kharif season, (iii) 3-month extension of PM Garib Kalyan Yojana (central government’s free foodgrain scheme), and (iv) spillover impact of elevated agri input prices.  
  • Consolidated fuel prices rose by a moderate 0.29% MoM, with bulk of the increase coming from 1.61% monthly increase in electricity prices even as retail prices for LPG, petrol, and diesel remained unchanged.·       
  • The silver lining in the inflation print came from sequential momentum in core inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous) easing to a 15-month low of 0.29% MoM in Sep-22 from 0.52% in Aug-22. Nevertheless, the annualized rate of core inflation continued to remain steady at 6.2% levels, similar to its last 3-months average.

Key highlights of WPI inflation

  • On sequential basis, WPI posted its third consecutive monthly contraction, with Sep-22 registering a print of -0.65% MoM vs. -0.58% in Aug-22. 

  • The consolidated food & beverages index saw a sequential fall in momentum, with a print of -0.46% MoM in Sep-22 vs. 1.04% in Aug-22. At a granular level, while cereals and vegetables saw buildup of price pressure, the same got offset by decline in price for fruits and manufactured food items (likely on the back of recent moderation in price of edible oils).
  • The consolidated fuel & power index saw its third consecutive monthly fall with a print of -0.83% MoM in Sep-22 vs. -5.76% in Aug-22. At a granular level, the fall was led by decline in prices of Crude Petroleum & Natural Gas, Pet Coke, Naphtha, LPG, Kerosene, Furnace Oil, ATF, etc.·        
  • Core inflation (headline WPI excluding food & beverages and all forms of fuel items) eased to a 19-month low of 6.77% YoY in Sep-22 from 8.09% in Aug-22 on the back of drop in sequential momentum to -0.63% MoM vs. 0.14% in Aug-22. The decline was led by drop in prices of Non-food Articles and Minerals within Primary Articles, and Basic Metals and Textiles within Manufacturing Items.


Outlook

The ongoing disinflation in most international commodity prices is getting captured by WPI inflation – if the current trend persists, then WPI inflation could briefly touch negative territory in Q1 FY24.

This makes us hopeful of expecting a decelerating trend in CPI inflation in H2 FY23 and beyond although the process is likely to be gradual. We also take comfort from the following factors: 

  • The New York Fed’s Global Supply Chain Pressure Index (GSCPI) moderated for the fifth consecutive month in Sep-22 to move closer to normal Levels vis-à-vis its history.·        
  • At a headline level, southwest monsoon ended the season with a 6% surplus rainfall vis-à-vis the long period average. Barring lower acreages in paddy and pulses, this should be broadly supportive of food inflation.
  • Government administrative measures including the recent ban on exports of broken rice and imposition of 20% tax on export of non-basmati rice should help curb price pressures on the margin.

However, there are also risk factors that need a close watch: 

  • Erratic rainfall in the month of Sep-Oct’22 so far poses some challenges for arrival of early kharif produce. In addition, the extension of PMGKY (government’s free foodgrain program for the rural poor) by another 3-months until Dec-22 could provide ancillary pressure on foodgrain inflation.
  • Rupee weakness would increase the burden of imported inflation
  • Impact of hike in GST rates on some items of mass consumption along with hike in electricity tariffs by state discoms is yet to be fully captured.  

Overall, we believe risks surrounding our FY23 CPI inflation forecast of 6.7% are evenly balanced. 

Annexure

Table 1: Key highlights of CPI inflation 


Chart 1: Sharp deceleration in WPI inflation bodes well for CPI inflation