Volatile food prices push inflation higher

The CPI based inflation moved higher for the second consecutive month and has now stayed outside the RBI’s target range for the ninth consecutive month. The headline inflation number for the month of Sep’22 was reported at 7.41%, as compared to 7.00% in the preceding month and 4.35% during the year ago period. The uptick in food inflation continued to impact the headline numbers. The core inflation too remained elevated and breached the 6% mark after a gap of three months.

The Consumer Food Price (CFP) inflation continued to trend higher, mainly impacted by the extended monsoon being witnessed across the country. The CFP based inflation was reported at 8.60% for the month of Sep’22 as compared to 7.62% for the month of Aug’22. The month-on-month sequential rise in food inflation quickened to 0.91%. If the erratic weather patterns sustain then food basket can be expected to maintain an upward trajectory over the near term. The components of food basket that witnessed heightened price pressures were Cereals, Milk Products and Spices. The vegetables component saw the sharpest surge in prices. The inflation for Clothing, Fuel & Light, Housing and Miscellaneous was reported at 10.17%, 10.39%, 4.57% and 6.06% respectively.

Fuel Price
Brent which is currently at around US$ 92 per barrel is at a very critical level. This is because of three reasons. 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. Second, the holiday season is going to be on in the next two 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. But the most important factor that is likely to impact price is that the oil supply from Russia would be curtailed by almost 50% by December of this year. Thus, despite strength of the US Dollar as indicated by the Dollar Index, oil price is expected to stay northbound mainly on account of supply restricting factors, and therefore, we could see a retest of higher levels in the coming weeks.

Core Inflation
Core CPI breached the 6% mark and was reported at 6.07% for the month of Se’22 as compared to 5.84% in the preceding month. The stickiness and gradual upward movement in core inflation is reflective of the resilience of demand. The services industry inflation coupled with strong demand for consumer durables may lead to pricing power improving in the hands of the manufacturers. The strong demand expected during the festive season may keep the upside risks to core inflation at the fore.

In the wake of the unseasonal monsoons the upside risks to inflation has only increased. Notwithstanding the firmness in food prices, the core inflation too has remained sticky at higher levels. As the demand indicators remain healthy, the RBI may not take a pause in its rate hike program just as yet.
The initial expectations for the domestic repo rate were pinned around the 6% mark, but as the inflationary pressures have shown no signs of abating domestically as well globally the expectations of terminal repo rate have been revised higher. While inflationary trajectory would be the key deciding factor for the quantum of further rate hikes, the domestic policy decisions would also be influenced by the growth trade-off and the terminal policy rate in the US. The rate action by the US has put the INR under pressure and its steep slide has been prevented by RBI’s currency market interventions. Going ahead the RBI’s ability to intervene in the currency market may get restricted by the shrinking forex reserves and it may have to utilise the policy rate tool to support the currency as well.


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