Inflation eases to a three-month low

The CPI based inflation eased for the month of Oct’22 and was reported at 6.77%. The headline inflation number for the preceding month and for the year ago period was 7.41% and 4.48% respectively. The easing in YoY inflation for food prices was the primary contributor to some respite seen in headline numbers. The core inflation though remained sticky at around 6% levels.

The Consumer Food Price (CFP) inflation eased on a YoY basis but the underlying pace of rise remained intact as was visible from the sequential comparison. The CFP based inflation was reported at 7.01% for the month of Oct’22 as compared to 8.60% for the month of Sep’22. On the other hand, the month-on-month sequential rise in food inflation quickened to 1.08%, as compared to 0.91% in the preceding month. The effect of erratic monsoons is still visible in the sequential numbers. The components of food basket that witnessed heightened price pressures were Cereals and Spices. The vegetables prices continued to report inflationary pressures, but with the weather component out of the equation this component may ease going ahead. The inflation for Clothing, Fuel & Light, Housing and Miscellaneous was reported at 10.16%, 9.93%, 4.58% and 5.90% respectively.

Fuel Price
Brent is currently trading at US$ 97 per barrel and it is more or less on the lines that we had anticipated in the last update. The fuel prices are at a very critical level. This is because of three basic factors that are likely to drive the prices. The first is the likely onset of winter very soon and the expectations of a strong winter which would require higher consumption of fuel for heating devices. The holiday season is going to be on in the next one month and that is the time most people would take to the highways given the fact that the pandemic prevented mobility in the last two years. The second factor is the zero covid policy of China. There were reports of China easing this policy and it led to some price uptick in global markets. But China was quick to deny the easing of the covid policy. A third factor that is on relevance to the oil markets is the likely capping of Russian oil price as the embargo takes effect, and the curtailment of Russian output by half.

Core Inflation
Even as the headline inflation eased the Core CPI remained largely stable around the 6% mark for the month of Oct’22. The stickiness in core inflation is reflective of the resilience of demand. The Clothing and Footwear based inflation remained in double digit for the second month in a row. The housing inflation too remained strong and so did the inflation numbers for Miscellaneous component. The inflation emanating from the services industry is expected to be sticky and may even have an upward bias, given that it is the first festive season in two years without any pandemic related restrictions.

The headline inflation numbers have eased but it remains outside the target range of RBI. The 10th consecutive reading outside the RBI’s range may not lead to any change of monetary policy stance. Having said that, these latest inflation numbers, both from US and India, have been able to influence the market expectations in terms of inflation and rate hikes.
The street sees these numbers as an initial sign that the peak inflation may be behind us, and thus monetary policy actions may not be as hawkish as they have been over the last few months. While the expectations may not be completely misplaced in the wake of stable to easing commodity prices, the one fact that needs to be kept in focus is that inflation numbers are still outside the range of central banks’ comfort zones.
From a domestic stand point, the focus will not only be on inflation numbers but also on US Fed actions. The weakness in INR vis-à-vis USD may continue if the RBI does not move in sync with the US Fed. The inflation and interest rate differential between US and India would also play a key role in determining the pace and quantum of policy rate actions.

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