Inflation eases, but expected to remain elevated…

The CPI based inflation stayed above RBI’s target range of 2% to 6% for the fifth consecutive month, although it has moderated marginally. The headline inflation for the month of May’22 came in at 7.04% as compared to 7.79% in the preceding month, and 6.30% during the year ago period. Even as the high base effect supported the easing in headline numbers, the core inflation remained above the 6% mark for the third consecutive month.

The Consumer Food Price (CFP) inflation, too eased marginally, was reported at 7.97% for the month of May’22 as compared to 8.31% for the month of Apr’22. While the YoY inflation eased, the momentum of price rises, as reflected by MoM growth, remained strong. The components of food basket that witnessed easing of price pressures were Egg, Fruits and Pulses. The components of the food basket that reported continued inflationary pressures were Meat & Fish, Oils & Fats, Vegetables and Spices. Along with the effects of seasonal pressures, the second-round effect of hike in fuel prices on transportation costs are expected to keep food inflation elevated. The inflation for Clothing, Fuel & Light, Housing and Miscellaneous was reported at 8.85%, 9.54%, 3.71% and 6.82% respectively.

Fuel Prices: The price of brent crude after dipping briefly in the month of Apr’22 below the $100 per barrel mark has again scaled the highs of Mar’22, i.e., it has moved up above the $120 per barrel level. The inflationary concerns across the globe have increased the potential risks to the nascent growth recovery. The deteriorating growth outlook and the resultant impact on demand is not yet reflected in oil prices. At the current juncture the movement in oil prices is largely being influenced by the news flow pertaining to the Russia-Ukraine war. Thus, we believe, any positive developments on the geopolitical front may be the catalyst required for the growth concerns to get reflected in oil prices.
Core Inflation: The core inflation (ex food and fuel) has now remained above the 6% mark for three consecutive months. The core inflation came in at 6.09% for the month of May’22 as against 6.97% for the preceding month. The price pressures are expected to continue, even as the momentum slows down, as the demand for various goods and services gradually attains the pre-pandemic levels. The input costs getting passed-on to consumers will also have its bearing on core inflation. The inflation for Miscellaneous component, largely reflective of service industry, is expected to remain firm as the demand for services of contact intensive industries improves. If there are no flare-ups in pandemic driven infection numbers, the services for which inflation is below 6% at the current juncture such as Health, Recreation and Education may report inflationary pressures rising going ahead.
Outlook: The inflationary pressures are expected to remain elevated over the near to medium term. The oil prices may remain sticky, as there is no immediate respite in sight from the geopolitical concerns. The second critical factor would be the trajectory of food prices; food and beverages component represent close to 46% of the domestic CPI. With that in context, the upcoming monsoon’s satisfactory spatial and temporal distribution would be of import to keep food prices in check.
The RBI is now firmly focussing on its inflation targeting mandate as against the growth supporting stance it had adopted during the pandemic period. The policy rates are headed higher from here as the headline inflation numbers and the risks to inflation remain on the higher side. The actual quantum of rate hikes would be dependent on the RBI’s willingness with regard to an acceptable level of trade-off of growth to bring inflation under control. From an investment perspective, with policy rates expected to be revised higher further, it would be advisable to remain invested at the shorter end of the yield curve.



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