Jan-22 retail inflation touches 6.01% as food prices surge

If Dec-21 CPI inflation at 5.59% was 58 bps higher than Nov-21, the Jan-22 CPI inflation is another 42 bps higher than Dec-21. Consensus estimates had pegged retail inflation for Jan-22 at above 6%, outside the upper tolerance limit of RBI. In a way, inflation was magnified by the low-base effect. CPI inflation was 4.59% in Dec-20 and fell further to 4.06% in Jan-21.

In Jan-22, the CPI inflation crossed 6% after a gap of 7 months. However, it also marked the 28th month that retail inflation stayed above the RBI median target of 4%. The tapering inflation trend between May and September last year has been reversed between October and January, with pressure coming predominantly from food prices.

The most important trigger for higher headline inflation in Jan-22 was food inflation, rising 138 bps from 4.05% to 5.43%. In last 3 months, food inflation scaled up by over 450 basis points, despite robust Rabi arrivals expected. Fuel inflation and transport inflation remained high but tapered to 9.32% and 9.36% respectively. The recent spike in Brent crude prices to $96/bbl, would most likely offset the gains of lower excise and VAT on oil. The big concern in Jan-22, as we shall see later, was the sharp spike in core inflation.

Rural food inflation surges higher in Jan-22

Rural inflation was sequentially up from 5.36% to 6.12%, driven by a sharp spike in rural food inflation; up from 3.39% to 5.18%. Rural food inflation has spiked over 400 bps in last 2 months. Rural vegetable inflation bounced back to 1.40% even as inflation in oils and fats stays elevated at 10.6%. Rural clothing and footwear inflation are near double digits. Rural fuel inflation is also up at 8.44%, even as high protein items push up the rural food basket.

On the urban inflation front, vegetables inflated at 11.54%, a sharp spike in the last 2 months. Some of the big contributors of urban inflation were oils and fats at 15.15%, Fuel at 10.84% and transport at 10.49%. Core inflation was sharply higher in rural and urban India.

Core inflation above 6% for fourth month in succession

January 2022 marked the fourth successive month in which core inflation, at 6.21%, stayed above the 6% mark. Core inflation has stayed above 6% in seven out of the last twelve months. The sharp spike in core inflation in Jan-22 can be attributed to supply side constraints and downstream effect of higher crude prices. Core inflation excludes food and fuel and any inflation control plan must necessarily begin with controlling core inflation.

Month	Food Inflation (%)	Core Inflation (%)
Jan-21	1.96%	5.65%
Feb-21	3.87%	5.89%
Mar-21	4.94%	6.00%
Apr-21	1.96%	5.38%
May-21	5.01%	6.40%
Jun-21	5.15%	6.11%
Jul-21	3.96%	5.93%
Aug-21	3.11%	5.77%
Sep-21	0.68%	5.76%
Oct-21	0.85%	6.06%
Nov-21	1.87%	6.08%
Dec-21	4.05%	6.02%
Jan-22	5.43%	6.21%

 Data Source: MOSPI / CEIC

There have been some visible steps by the government. There has been a sharp cut in excise and VAT on petrol and diesel. However, crude has surged from $74/bbl to $96/bbl in the last 2 months, so the cuts would have been largely neutralized. Then there are specific instances like the cut in customs duty on palm oil, which is likely to ease the cooking oil inflation in India. Controlling core inflation is normally a trade-off between revenues and the larger goal of inflation control; which is what makes it complicated.

Drovers of the food basket in Jan-22?

The Feb-22 monetary policy has toned down inflation expectations for FY23 to 4.5% on expectations that a robust Rabi would temper prices. Here is how some key food basket items moved in the last few months.

• Meat and fish inflation rose to 5.47% in Jan-22 compared to 4.58% in Dec-21 and 5.55% in Nov-21. Egg Inflation also bounced to 2.23% in Jan-22 compared to 1.48% in Dec-21 and (-1.31%) in Nov-21.
• Fruits inflation tapered further to 2.26% in Jan-22 compared to 3.54% in Dec-21 and 6.03% in Nov-21. Vegetable inflation spiked to 5.19% in Jan-22 compared to (-2.99%) in Dec-21 and (-13.62%) in Nov-21. This was a key driver, with its high weightage.
• Pulses inflation increased to 3.02% in Jan-22 compared to 2.43% in Dec-21 and 3.18% in Nov-21. Cereals inflation picked up sharply to 3.39% in Jan-22 compared to 2.62% in Dec-21 and 1.51% in Nov-21. Sugar inflation tapered further to 5.36% in Jan-22 compared to 5.58% in Dec-21 and 6.16% in Nov-21.

The food basket saw a surge in prices due to specific surge in 2 index-heavy items viz. cereals and vegetables.

What does the inflation figure mean for RBI policy?

The RBI fended off rate hikes in Feb-22 policy but may find it tougher in Apr-22, if the US also gets aggressively hawkish. There are some key challenges.

• Core inflation at 6.21% means the government will have to act to regulate supply chain issues. On the downside, such measures impact revenue flows.
• With 85% dependence on imported fuel, Brent crude at $96/bbl poses a real risk to inflation and to the Indian rupee.
• A lot will depend on the Mar-22 Fed meet. If the Fed targets 175-200 bps rate hikes in calendar 2022, then RBI may have to follow suit just to protect flows.

When the US faces 7.50% retail inflation, India may be forgiven for 6.01% inflation. But the message is that rate hikes have to happen; sooner rather than later.