Impact: Negative (Inflationary Tendency)

Brief: CPI posting 3.8% in September, 2018 is nearly 10 bps lower than our own very non-conservative expectation for the month. This tendency has led us to believe that the supposed undershooting of the consumer inflation is because of the higher weight attributed to food articles. A redistribution of the index is therefore a need of the hour.

Despite the September CPI number breaking the downward trend, we believe that inflation will likely be below the RBI's estimate of 4.8% for H2 FY19.
CPI posting 3.8% in September, 2018 is nearly 10 bps lower than our own very non-conservative expectation for the month.We were expecting the overall consumer inflation to post 3.9% considering the fact that higher oil price and fall in value of Indian rupee will import inflation. However, given a 6% growth in crude prices between August and September (MoM), transmission seems to be very low. It must be considered here that base for both these months, under consideration are constant at nearly 3.3%.
There are several reasons for this outcome and obsolete weightage tops the list. The CPI is essentially a combination of Headline and Core inflation numbers. While the former further comprises of Food & Fuel prices, the latter contains all other items, which are essential in a household's basket (representing both discretionary and non-discretionary spending). As food prices remain perpetually low, the Headline component's representation of a total of 45.9% in the overall consumer index is adding to the uneasiness.
A sub-category level trend shows that while core inflation stood at 5.6% during the said period, food inflation as a standalone metric stood at just 1.1%. This tendency has led us to believe that the supposed undershooting of the consumer inflation is because of the higher weight attributed to food articles. Food items accounting for 39% in India's overall consumer inflation basket strengthens our hypothesis.
If we compare India's CPI weightages to that of its BRICS peers, the disparities become starker. As mentioned, while India's food basket has been allocated nearly 39%, the category's share is only 25.5% and 19.1% in Brazil and South Africa, respectively. While it is understood that both these contemporaries are termed upper middle income countries as compared to India's classification of lower middle income, the latter is fast approaching that target. This is because India has been averaging a GDP growth of 7.5% (over a period of ten years) as compared to the other two, averaging less than 3%.
Considering this, what is confusing is the fact that while India's per-capita Income is growing at 5.8%, the price of food articles is growing at below 2% in the country. It is evident that through the effective implementation of the MSP regime and bettering logistic support, India may have controlled its food inflation substantially. Price control of seasonal fruits and vegetables (along with high growth protein based items is recent past) is therefore overwhelming other categories, which are more inflationary but represent a lower weightage.
Items such as Housing, Amusement/ Recreational expenses, Consumer Durables, FMCG and Transportation have gained in prominence over time but continue to represent a lower weightage in the overall price index. We believe this must change and weightage of the Indian consumer price index must represent the evolving ground realties of the Indian economy. A redistribution of the index is therefore a need of the hour.

Category wise Weight Distribution:

Source: MOSPI, BCB, Statistics South Africa, Acuité Research
Note: # indicates weight for communication is included in transportation, * indicates weight for that segment included in other categories.

India's Annual Inflation:

Source: MOSPI/CSO, Acuité Research