Slower rise in food prices helps ease retail inflation to 6.77%, still over RBI tolerance

Food inflation, which accounts for nearly 47 per cent of the CPI basket, eased to 7.01 per cent per cent in October from 8.6 per cent the previous month while fuel inflation continued to stay elevated at 9.93 per cent.

Retail inflation has stayed above the RBI Monetary Policy Committee’s tolerance band of 2-6 per cent for over three successive quarters with the October print marking the tenth month of staying above 6 per cent and three years of staying over 4 per cent.

On November 3, the MPC held a special meeting to finalise a report to the government regarding the failure on meeting its inflation target. RBI governor Shaktikanta Das had said Saturday he expected retail inflation to come below 7 per cent in October.

Sequentially, though, the index values for headline inflation and food inflation were up on a month-on-month basis. According to the latest data, inflation in rural areas was at 6.98 per cent, higher than the urban inflation of 6.50 per cent in October, with food inflation at 7.30 per cent and 6.53 per cent, respectively.

Cereals inflation continued to rise to 12.08 per cent in October from 11.53 per cent a month ago, while spices inflation increased to 18.02 per cent from 16.88 per cent. Vegetables inflation eased to 7.77 per cent in October from 18.05 per cent. Clothing and footwear inflation remained in double digits at 10.16 per cent in October, while fuel and light inflation inched down to 9.93 per cent in October from 10.39 per cent a month ago.

Among states, the highest inflation rate in October was recorded by Telangana (8.82 per cent), Andhra Pradesh (7.93 per cent) and Haryana (7.79 per cent).

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The Ministry of Finance said that prices of commodities like crude oil, iron ore and steel had sobered in global markets. “This, coupled with measures taken by the Govt. to rationalise tariff structures of major inputs to augment domestic supply, helped to keep cost-push inflation in consumer items under control,” it said in a series of tweets.

It added that to soften the prices of edible oils and pulses, the government has taken measures such as rationalisation of tariffs on imported items and stock limits on edible oils to avoid hoarding. “Further, the Government has taken trade-related measures on wheat and rice to keep domestic supplies steady and curb the rise in prices. The impact of these measures is expected to be felt more significantly in the coming months,” it said.

Data released separately by the Ministry of Commerce and Industry showed Wholesale Price Inflation eased to a 19-month low of 8.39 per cent in October, helped by a higher base and an easing of year-on-year price levels across sectors. Lower wholesale prices translate into a gradual pass-through of input cost pressures by producers, resulting in an easing of pricing pressure on the retail side.

Experts said that though the base effect may favour the next CPI inflation print for November, it is also expected to be above the target amid risks such as the recent sequential rise in prices of global commodities, supply disruptions of perishables owing to excess rains, and a robust demand for services.

Also, cereal inflation remains a concern. “While decline in inflation is good news for the economy, continuous increase in cereals inflation does not augur well for the households at the bottom of the income pyramid, as they spend a disproportionately larger share of their income/expenditure on food products. Cereals and product inflation has been in excess of 5% since March 2022 and in double digits in the past two months,” said Sunil Kumar Sinha, Principal Economist, India Ratings.

Services inflation eased to a 29-month low, while core inflation saw a marginal dip to 5.98 per cent in October from 6.07 per cent in September, as per data by India Ratings. “Festive demand could be a reason for the marginal dip in core inflation in October. Sustaining demand from November 2022 onwards is not only important from the growth perspective but also from the point of view of monetary policy. The agency expects retail inflation to be in the range of 6.4-6.5% in November 2022,” Sinha added.

Experts said the above-target-level inflation rate is expected to result in another rate hike by the RBI in its next meeting in December. “…We expect inflation to very gradually moderate into the target range. Taking into account the available high-frequency prices and today’s data, we currently track November inflation at 6.5% y/y, largely driven by food prices. We maintain our view that the RBI could deliver a 35 bps rate hike at the December MPC to bring the repo rate to 6.25%, before shifting to a neutral stance. While CPI is on a moderating trajectory, 10 consecutive months of above-target inflation would warrant caution from policymakers,” said Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays.