Current phase in 3 points as inflation eases to 6.93%

Inflation, as measured by the consumer price index (CPI), declined marginally in November to 6.93%, from 7.61% the previous month, bettering analyst estimates — a Reuters poll projected a number of 7.1% — and marking the end of an upward surge since July, although experts said they do not see it dipping below the upper limit of the Reserve Bank of India’s tolerance band of 6%. If the March, 2020, value of 5.84% is excluded, retail inflation has been above the 6% mark every month since December 2019.

Wholesale inflation, measured by the wholesale price index (WPI), in the month of November increased marginally to 1.55% from its October value of 1.48%. WPI is at the highest level since February 2020 and it has been rising continuously since June.

How should one read the current inflationary phase? Here are four charts which answer this question.

1. Both food and non-food components of CPI have fallen

Food items account for 39% of the typical household’s budget. This makes retail inflation, measured by CPI, very sensitive to food prices. Even onions and potatoes can lead to a spike in the headline inflation number at times. WPI has a much lower weight of food items (24.4%). This is one of the reasons why CPI and WPI indices often show diverging trends. To be sure, even the non-food component of the two indices differs significantly, because WPI is meant to capture producer prices while the CPI is a measure of prices relevant to household budgets. Both food and non-food components of CPI have shown a moderation in the November numbers. While food inflation has come down from 11% in October to 9.43%, non-food inflation has come down by a smaller extent from 5.39% in October to 5.27% in November. Experts believe that non-food inflation could continue to be a problem area. “As a vaccine comes into play, there could be a wave of pent-up services demand. Alongside this, as large firms and their employees do relatively well through this period, they are likely to demand more services, stoking services inflation further,” said a note by Pranjul Bhandari, chief India economist at HSBC Securities and Capital Markets (India) Private Limited.

2. …but food inflation is still high and more broad-based than it was a year ago…

While food inflation has fallen significantly, there is also a role of favourable base effect in this decline. Food inflation growth in December 2019 was 10%. The current phase of high food inflation is different from what it was last year. The food component of CPI grew at 10%, 14.2%, 13.6% and 10.8% from November 2019 to February 2020. However, this rise was mostly on account of vegetable prices, which grew 36.1%, 60.5%, 50% and 31.6% during these months. This time, the food price spike has a broader base. While the November inflation has come down for all food sub-categories excluding oils and fats in comparison to October, it is still growing in double digits for the categories of egg, fish and meat, oils and fats, vegetables, pulses and spices. This means that the seasonal moderation in vegetable prices, which seems to be already happening, might not be enough to quickly cool down food price inflation. Given the fact that international prices of important edible oils such as palm oil and soybean oil have increased sharply in the past few months, domestic prices are likely to remain elevated. According to International Monetary Fund data, international prices of soybean oil and palm oil in November were the highest since August 2014. Edible oil accounts for half of India’s agricultural imports.

3. …the current inflationary spike is not wholly a result of high oil prices, but there could be bad news

Because India imports more than 80% of its crude oil, domestic prices are extremely sensitive to international oil prices. The high inflation phase during the second United Progressive Alliance government coincided with a sharp spike in international crude prices. Similarly, low inflation during most of the current government’s first term was a result of crude prices falling.

Crude prices fell sharply between February and April, but have since been rising.

Indian consumers did not benefit from the historical low prices of crude because of the government’s taxation policy. The tax component of petrol and diesel prices, which is more than the base price, has kept prices high. And in recent months, Indian oil companies have increased prices in keeping with the global trend in crude. If that trend continues, it could mean a further surge in inflation.

“The abatement in the surging India’s inflation data is mainly due to some moderation in food prices. But the broad-based sequential rise in petrol prices will keep the inflation data above the RBI’s upper band of 6% for some time going ahead. However, today’s beginning inflation print will raise a glimmer of hope that RBI may cut rates at its February meeting to support growth,” Rahul Gupta, head of research currency, Emkay Global Financial Services, said in a statement.

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