Deep Dive. The pain points in consumer price inflation

Retail inflation may have soared to an eight-month high in September with food inflation close to double-digits, but experts think that it can soften in coming months due to improved supply and base effect.

CPI inflation has remained consistently above the RBI’s comfort zone of 6 per cent since April this year and surged to 7.34 per cent in September with consumer food price inflation close to 10 per cent.

High retail inflation was visible in both urban (7.26 per cent) and rural (7.43) areas in September.

Food inflation remains high

The main pain point in CPI inflation has been food and perishables and, in fact, nearly 85 per cent of the spike in CPI inflation in September is estimated to have come from perishables. Within the food and beverage basket, items such as meat and fish, pulses, eggs, vegetables, condiments and spices have seen a double-digit spike in prices, while inflation in other food items such as cereals and milk has also been high.

Overall, the food and beverage basket accounts for 45.86 per cent of retail inflation, of which vegetables has one of the highest weightage at 6.04 per cent. In September, the CPI inflation in vegetables surged to 17.4 per cent from 6.8 per cent in August in urban areas. The price increase was higher in rural areas at 22.7 per cent in September. Inflation in fruit prices is relatively milder, below 4 per cent.

In all other food items, retail inflation in September was largely in sync with the previous month levels.

However, analysts note that core CPI inflation is still low. “Core CPI inflation continued to remain low at 4.09 per cent, rising a shade from 3.97 per cent in August. With favourable base effects kicking in, we track October’s CPI inflation at 6.5 per cent,” said a BofA Securities report.

Impact on crude prices

How fuel and lighting with a weight of 6.84 per cent in the CPI inflation basket will behave, is difficult to predict as of now. In September, retail inflation in fuels and lighting was at 8.4 per cent compared to 9.3 per cent a month ago.

Among the fuel category, WPI in crude oil inflation is expected to remain range-bound, but LPG index may climb higher, while demand and prices of petrol and diesel are likely to be closer to last year’s levels.

Within the WPI, fuel and power inflation basket dipped significantly during the lockdown months with the index falling 23 per cent in May 2020 compared to a year ago, due to cheaper cooking gas, petrol and diesel.

Since there was no significant variation in coal or power costs, the variation in the fuel and power basket was largely on account of cheaper petroleum products. The deflationary trend in the index for the fuel and power basket, as well as crude petroleum, has continued into September on the back of lower prices and lesser consumption.

Most variation is seen in the index for LPG where there was a deflationary trend from April to July due to the distribution of free cooking gas cylinders. But with nil subsidy being extended to all other (18 crore) LPG consumers and the free cylinders being exhausted, the cooking fuel inflation is on a rise again in the August and September.

Outlook on inflation

Most economists expect inflation to ease from October and decline sharply in November.

In its inflation outlook, the RBI’s Monetary Policy Committee has projected CPI inflation at 5.4-4.5 per cent for the second half of 2020-21 and at 4.3 per cent for the first quarter of 2021-22, with risks broadly balanced.

In the latest World Economic Outlook, the IMF has forecasted that consumer price inflation in India will rise to 4.9 per cent in 2020 from 4.8 per cent in 2019 and will then ease to 3.7 per cent in 2021; rising to 4 per cent by 2025. A note from HSBC Global Research highlighted the issue of supply-side disruptions.

“We remain watchful of upside risks emanating from the various sticky supply-side disruptions, particularly in the face of rising festival demand,” it said.