CPI inflation sharply up again, RBI’s inflation targeting in a fix

India’s consumer price index (CPI)-based inflation at 7.3% in September 2020 is the highest inflation print so far this fiscal. It was further up from 6.7% in August and even higher than 7.2% seen in April.

While it was expected that September CPI inflation would be marginally higher than August’s, such a rise was not. With this, headline inflation has remained outside the upper bound of the Reserve Bank of India (RBI)’s target range of 2-6% for the sixth month straight this fiscal.

It looks like supply disruptions continue to plague the economy and keep prices elevated, especially for food.

The September surge was led by food inflation, which was back in double digits for the first time since April. Core inflation too remained stubborn. That said, there was some relief from fuel inflation which softened in September, after rising in previous two months. It is also important to note that the final August inflation data, released today, remained unchanged at 6.7% which could suggest that the pandemic related glitches in collecting data may be out of the way now, making incoming provisional inflation data more reliable.

Food inflation, with 39.05% weight, rose 167 basis points (bps) to 10.7% in September, from 9.1% in August. At a five month high, September food inflation was just one percentage point shy of 11.7% in April, the first month of the nationwide lockdown that likely witnessed the highest amount of supply disruptions. Feeding into high food inflation were protein categories and vegetables. In animal protein category, meat and fish inflation rose to 17.6% in September, from 16.5% in August and eggs jumped to 15.5% from 10.1%. Pulses inflation too, rose to 14.7%, from 14.4%, reversing the declining trend of the previous four months. Vegetable inflation jumped the most – to 20.7% from 11.5% - and led the rise in food inflation. In fact, fruits, which had hitherto remained low and stable (averaging 1.2% so far, this fiscal) also rose to 3.2% in September. Clearly, supply disruptions continue to perk up inflation, despite substantial unlocking of the economy.

Fuel inflation eased marginally to 4.8% in September from 5.0% in August. Within that, fuel and light inflation was down 30 bps to 2.9% and petrol and diesel inflation down 20 bps to 12.0%.

Core inflation, i.e., headline sans food & beverages and fuel & light, continues to remain stubborn making the management of inflation challenging at a time when food inflation refuses to calm down. At 5.62% in September, it was at a 22-month high and almost unchanged from August’s 5.61%. This measure of core inflation has a weight of 47.3% and is a critical contributor to headline inflation. Core categories that continued to trend up were clothing & footwear (up 20 bps to 3.0%), health (up 10 bps to 4.9%), transport and communication (up 50 bps to 11.5%) and education (up 50 bps to 2.2%). On a positive note, there was a noticeable decline in personal care and effects inflation (to 12.3% from 14.5%) which has so far remained the biggest contributor to the core inflation.

Given the stickiness in CPI inflation above the RBI’s target range of 2-6% and no clear signs of inflation cooling off yet, the space for a rate cut by the MPC is increasingly getting crunched. While inflation is expected to subside in the second half of the fiscal when fresh kharif harvest hits the market and a low base effect comes in handy, a rate cut may have to wait, unless there are clear signs of a sustained softening in inflation.

September’s inflation print bring the first half inflation to an average of 6.7%. Not only does food inflation continue to surprise on the upside, core inflation too remains sticky. CRISIL therefore revises up its fiscal 2021 CPI inflation forecast to 5.6%, from 5.2% earlier.