Hold your horses; September 2022 inflation surges to 7.41%

The CPI inflation (retail inflation) for the month of September 2022 came in at 7.41%, higher than the Bloomberg consensus estimate of 7.30%. In the last 2 months, inflation has spiked by 70 bps, although it is still below the peak levels of 7.79% touched in April 2022. There was a spike in food inflation even as core inflation also surged higher during the month of September 2022. This also marks the ninth consecutive month that inflation has been above the outer RBI tolerance limit of 6%.

Incidentally, September 2022 also marks the 36th successive month that retail inflation stayed above the RBI median target of 4%. It must be remembered that 6% is the outer tolerance limit while the target median inflation in India is 4% as per RBI estimates. Food inflation spiked sharply by 98 bps from 7.62% to 8.60%, but core inflation once again crossed the 6% mark in September 2022. The RBI tightening measures, which began in May 2022, did appear to be delivering results in the beginning, but now the slack is showing up.

Data Source: MOSPI

When the food inflation was falling couple of months back, we had pointed out that the concern over the lower Kharif acreage was a potent issue and could impact sentiments as well as the agricultural supply chain. Food inflation is not just an Indian phenomenon but a global phenomenon.Much of it is also an outcome of countries becoming cagey about exporting key agricultural products for fear of domestic food security. The lower Kharif output resulted in a sharp fall in the output of cereals this year and that has been a key driver of food inflation. Also, the erratic and delayed monsoons has also resulted in vegetable inflation shooting through the roof in most of the months.

Rural inflation continues to be higher than urban inflation

There has been a mixed trend on the inflation front in rural India. On a MOM basis, the rural food inflation increased from 7.60% to 8.53%. However, the overall rural inflation has also risen from 7.15% to 7.56. It is not just food, but non-food items are also putting pressure on rural inflation. Supply chain constraints are still exerting pressure on inflation in rural areas and that has led to rural non-food inflation and food inflation staying at elevated levels.

In terms of the rural food basket, there have been several major drivers in September 2022. For instance, rural vegetable inflation stood at 16.78% while spices inflation was at 17.11% in rural India. Also, inflation in cereals is at 11.97% while the inflation in fruits and milk products are around 7.4% in rural India food basket. There has been some relief in high protein items like eggs while oils & fats have seen negative food inflation in rural India and that is good as it makes nutritious food cheaper.

However, the rural basket was not just about food but also about the non-food items. For instance, fuel inflation is still high at 9.77% while clothing at 10.14% and footwear at 12.10% indicate that rural core inflation is also rising rapidly. In comparison, urban India has seen much higher fuel inflation at 11.44% while the problem of footwear and clothing is almost similar to rural India.

Core inflation is above 6% in July 2022, as non-food inflation remains high

Core inflation has hovered around the 6% mark on a consistent basis. While the core inflation for September 2022 was 6.1%. the average core inflation for the full year is estimated at around 6%. The core inflation refers to the basket excluding food and fuel. However, it must be noted that the price of petrol and diesel has a strong impact on core inflation due to strong externalities of fuel i.e. its trickle down impact on other sectors.

The structural nature of core inflation makes it tougher to manage and regulate and that is the key challenge. The last Economic Survey ahead of the Union Budget 2022 underlined the need to focus on core inflation more than headline inflation. The target has always been to keep Core inflation around 4%, but that looks some time away and also looks unlikely in the present circumstances amidst all the supply chain constraints.

Data Source: Ministry of Finance Estimates

In the latest IMF World Economic Outlook (WEO), the chief economist of IMF has warned that India’s fiscal policy is often at cross purposes with the monetary policy and that is not a good portent of things to come. The challenge for India is that controlling core inflation is a trade-off between government revenues and the larger goal of inflation control. That is the dilemma for the Indian government today. The battle against inflation is having a fiscal cost in the form of duty cuts, and a focus on government revenues spikes inflation.

Here is the food basket story for Inflation September 2022

Here are some of the major highlights of the food basket story in July 2022

·         Let us first look at the high protein and high vitamin intake. Meat and fish inflation was tepid at 2.55% while eggs saw negative inflation of -1.79% oils and fats were also subdued at 0.37%. However, the inflation in mild and milk products remained fairly elevated at 7.13% for the month of September 2022.

·         Fruits inflation remained under control at 5.68% but vegetable inflation in September 2022 spiked to 18.05% overall. Among other products, pulses inflation was subdued at 3.05%, but the crux of the food inflation problems appears to be stemming from cereals inflation at 11.53%. These foodgrain output has been hit badly by erratic monsoons and a much lower acreage for Kharif production.
Overall, cereals, milk and vegetables remain the pressure point for September 2022 inflation largely due to their high weightage in the food basket.

RBI’s dilemma: To focus on inflation or growth

The RBI finds itself on the horns of a dilemma. Since March 2022, it has had a single minded focus on containing inflation. That looked to be succeeding in the first 3 months but in the last 2 months the inflation has surged by 70 basis points despite rugged RBI hawkishness. RBI has already hiked rates by 190 basis points and there is more to come. However, inflation is back at 7.41% in September 2022 and that puts the RBI in a piquant situation. Should it persist with killing inflation, even at the risk of slowing growth?

Perhaps, it is time for the RBI to change the narrative. Should the RBI wait for the Fed to turn less hawkish? That may not be required. The US dollar has the exorbitant privilege of being world’s central currency. In the Indian context, the hawkishness has hit growth, but inflation is still up and the rupee has gone for a toss. It is perhaps time for the RBI to take a relook at its philosophy of inflation control. Like China, India also needs to look at a more emerging market solution to the inflation and growth problem.