Easing Food Prices Keep Headline Inflation Under Check

The CPI based inflation eased for the third consecutive month on the back of fall in prices of food articles; headline CPI inflation was reported at 4.06% for the month of Jan’21 as compared to 4.59% for the preceding month and 7.59% during the year ago period. The headline inflation numbers touched a sixteen-month low and was reported  within the MPC’s target range after a gap of eight months. The sharp easing seen in the prices of food articles has been the key factor leading to subdued headline inflation over the last three months.

The Consumer Food Price (CFP) inflation touched a near term high of 11% in the month of Oct’20, since then the food basket has witnessed easing in inflationary pressures. From the high seen in Oct’20 the CFP inflation has eased to 1.89% for the month of Jan’21. The improvement in supply and the easing of logistical bottlenecks seem to be the prime factors influencing the food prices. The main components withing the food basket witnessing an easing trend have been Milk Products, Fruits, Vegetables and Cereals. Even as the food inflation has eased, the price levels for other categories have remained mostly stable. The prices of pan, tobacco and intoxicants component maintained an upward trend and reported double digit inflation. The inflation for other components such as Clothing, Housing and Miscellaneous remained mostly stable as well, with the risks slightly on the upside as economic growth improves.

Fuel Prices: The inflationary pressures emanating from the fuel components picked-up pace in the month of Jan’21. The fuel-based inflation was reported at 3.87% for the month of Jan as compared to 2.92% in the preceding month. Brent has moved up quite in line with expectations towards US$ 60 from a level of US$ 53 about a month back. The rise in oil prices has been supported by several factors in the last three months. The most prominent factor is the output restrictions by OPEC + and more conspicuously by Saudi Arabia. The US crude inventories have been showing some decline and this is a factor which may increase the price pressures. The biggest factor has been the enhanced economic stimulus in the US as also Europe which could put more money in the hands of the people and could push up spending, and consequently oil demand too.

Core Inflation: As against the easing seen in headline inflation, the core inflation remained largely stable. The core inflation remained stable at 5.65% for the month of Jan, same as the level seen in the preceding month. The Pan, Tobacco and Intoxicants continued to report double digit inflation. The Miscellaneous component, the indicator of price pressures in services industry, reported inflation of 6.49% in the month of Jan as compared to 6.60% in the preceding month. Within Miscellaneous component, heightened price pressures were seen in Recreation & Amusement, Health and Personal care & Effects. Within the Miscellaneous component the inflation has started inching-up in Transport & Communication. The increase in demand has improved the pricing power and it may only enhance as stable growth sets in.

Outlook: The fall in food prices has supported the transition of headline numbers within the RBI’s target range. The outlook for food inflation remains sanguine as supply issues are on the wane with the opening-up of the economy post lockdowns, especially keeping the prices of perishables under check. Apart from food prices, the inflationary risks for most of the other components remains marginally on the upside. The expected pick-up in growth will not only improve demand but also the pricing power of suppliers. A fast-rebounding economy may be supportive of price levels across products and services, but a sharp run-up is not expected as yet.

We believe the fall in inflation may provide the RBI some comfort in terms of maintaining the accommodative stance for an extended period of time, in its endeavor to support growth. But it in no way expands the room available to further ease the policy rates. The market yields can be expected to be largely a function of RBI’s actions in terms of liquidity management and market operations


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