October consumer inflation falls decisively to 6.77%

On a sequential basis, CPI inflation has fallen by 74 basis points. However, at a broader level, there still are some concerns. October is the 37th month that CPI inflation has exceeded median target of 4%. October also marks the 10th month in a row, when the inflation has been outside the 6% upper tolerance limit of RBI. The RBI has a lot of answering to do to the government, although the special meeting of the MPC may have already addressed the issue.

Actually if you compare the October inflation to the peak level of 7.79% in April 2022, the inflation has tapered by just 102 bps from the peak. In contrast, the WPI inflation has fallen by more than 800 basis points since May 2022. However, that would be like comparing apples and oranges, since the CPI inflation normally follows the WPI inflation with a time lag. In October 2022, Food inflation fell sharply by 159 basis points from 8.60% to 7.01%. Even core inflation fell to 5.9% in October. But one must focus on the base effect for a moment. The CPI inflation in October 2021 was 4.48% and since then it has been on an uptrend. That means; in the next few months, the base effect should favour lower inflation. That is assuming that supply chains don’t put too much pressure on prices.

Data Source: MOSPI

One of the negative outcomes of the lower than expected Kharif output this year is the spike in cereals inflation. For October, cereals inflation stands at 12.08%, but cereals inflation in rural India is much higher at 12.66% compared to just 10.86% in urban India. On the positive side, the late rains have also ensured full reservoirs, so the government expects the Rabi output to make up for the Kharif shortfall. We have to wait and watch.

Rural inflation is possibly the crux of the problem

There has been a mixed trend on the inflation front in rural India. On a MOM basis, the rural food inflation fallen from 8.53% to 7.30%. Even the headline rural inflation has fallen from 7.56% to 6.98. However, in the monthly inflation basket mix, rural inflation is much higher than urban inflation. That is putting a lot of pressure on rural purchasing power.

Out of the headline inflation of 6.77% for October 2022, rural India was at 6.98% while urban India was lower at 6.50%. If you look at overall food inflation at 7.01%, rural food inflation stands at 7.30% while urban food inflation is much lower at 6.53%. We spoke about rural cereal inflation being much higher than urban cereal inflation. But there are more instances. For example, in the food basket, rural inflation is sharply higher than urban inflation in the case of fruits, vegetables and spices.

However, the rural basket was not just about food but also about the non-food items. Rural fuel inflation is lower but transport inflation is higher. In rural India, the clothing inflation at 10.18% is higher than 9.14% for urban India. It must also be noted that rural inflation is lower than urban inflation in products like footwear, healthcare, recreation and education.

Core inflation drops below 6%, perhaps, due to weak rural demand

Core inflation (the inflation excluding food and fuel) fell to 5.9% in the month of October. However, it would be too early to celebrate. A lot of the fall in core inflation is driven by rural India and that is obviously a direct outcome of weak demand. As income levels have suffered and inflation continues to be high in rural India, it has had an impact on rural demand. If you look at the break-up of rural inflation, the maximum reduction has come from the rural segment. That is not a good signal as it shows pressure on demand.

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 core inflation has stayed above 6% for 5 out of the last 8 months. Ideally, core inflation of around 4% would be a big trigger for lower inflation levels.

Data Source: Ministry of Finance Estimates

One must not lose sight of what the last IMF World Economic Outlook (WEO) had said about Indian policy ambiguity about handling core inflation. The concern for the IMF was that, quite often, India’s fiscal policy had been at cross purposes with monetary policy. Here is the dilemma! Controlling core inflation is a trade-off between government revenues and the larger goal of inflation control. Any battle against inflation has a fiscal cost in the form of duty cuts, and a focus on government revenues spikes inflation.

Food basket inflation story for October 2022

Here are some of the major highlights of the food basket story for the month.

·         Let us first look at the high protein and high vitamin intake. Meat and fish inflation was higher at 3.08% while eggs saw negative inflation of -0.18% oils and fats were also subdued at -2.15%. However, the inflation in mild and milk products remained high at 7.69% for the month of October 2022.

·         Fruits inflation remained under control at 5.20% even as vegetable inflation came under control at 7.77% in October 2022. Among other products, pulses inflation was subdued at 2.78%, but the crux of the food inflation problems appears to be stemming from cereals inflation at 12.08%. Foodgrain output has been hit badly by erratic monsoons and a weak Kharif and the bet is now that the Rabi should make for the losses.

Overall, cereals, milk and vegetables remain the pressure point for October 2022 inflation, although vegetables also contributed to the tapering of consumer inflation.

RBI may be readying to shift gears

In our previous report, we had written that RBI was in the horns of a dilemma because inflation was not coming down but growth was suffering. The RBI stance had to take a middle path. Now there is a lot more clarity. The message form the US and India is that inflation is coming down in a decisive manner. For a growth-dependent economy like India, this could be the right time to shift gears and focus on growth; as Jayanth Varma suggests.

It is time for the RBI to change the narrative and talk less about inflation and more about growth. RBI has done its bit for bringing down inflation, toning down inflation expectations and ensuring price stability. The rest of the process has to be market driven. However, the current situation of high input inflation, high interest rates and tight liquidity is hardly conducive to rapid GDP and IIP growth. Moody’s expects India GDP growth in 2022 to outshine China by 400 bps. It is time for the RBI to help the Indian economy walk the talk!