Volatile food prices push inflation higher

The CPI based inflation moved higher, after easing for three consecutive months. The headline inflation number for the month of Aug’22 was reported at 7%, as compared to 6.71% in the preceding month and 5.30% during the year ago period. The uptick in food inflation was the key contributor to the hardening of headline inflation. The upward pressure on headline numbers was not only from food basket but core inflation hardened as well.


The Consumer Food Price (CFP) inflation broke the easing trend of three months and inched higher in the month of Aug’22. The CFP based inflation was reported at 7.62% for the month of Aug’22 as compared to 6.69% for the month of Jul’22. The food basket, which was losing momentum until last month, has again picked up some steam. The erratic weather patterns and the resultant volatile monsoon distribution is the main factor impacting food prices. The components of food basket that witnessed limited price pressures were Meat & Fish, Egg, Milk Products and Oils & Fats. The vegetables component saw the sharpest surge in prices. The inflation for Clothing, Fuel & Light, Housing and Miscellaneous was reported at 9.91%, 10.78%, 4.06% and 5.95% respectively.


Fuel Price
Brent has eased from its highs and is now trading closer to $95 per barrel; there are multiple factors at play for this recent slump in prices. The fall in prices is occasioned by the four important factors. In pursuit of the zero covid policy, China has shut down the Chengdu city one of the biggest cities with a huge population of almost 21 million. A second factor that has moderated the prices is probably the OPEC supply which has been steadily rising. Third, this positive news about supply has been further strengthened by a sharp rise in the US production which has now touched 11 million barrels per day. Four, there is a move by G7 countries to cap the price of oil from Russia. Russia has objected to this move though this move might cool down prices in the immediate term. Over and above all these factors, there is an emerging fear of a likely recession pulling down the global economy in the coming months.

Core Inflation
Core CPI is at 5.84% in August, as against 5.78% in the preceding month. This indicates that services industry is gradually gaining demand traction and with it the pricing power. As has been discussed earlier, the services such as healthcare, education, personal care and effects are some areas where inflationary pressures may emerge and that played out during the previous month. Going ahead as well, services industry inflation is expected to keep core inflation sticky.

The current uptick in headline inflation numbers is a hard reminder of the fact that the inflationary pressures have not dissipated meaningfully and the path to bringing the inflation within RBI’s target range is not going to be a smooth one. The recent set of numbers imply that RBI cannot be expected to let its guard down against inflation. As was discussed in the previous issue of FinSights covering inflation numbers, the uneven distribution of monsoon may create temporary inflation spikes. This coupled with sticky core inflation may lead to RBI effecting one more rate hike before it might take a pause. The expectation of a pause is based on the fact that policy decisions work with a lag and RBI may decide to gauge the impact of its decisions before deciding on the future course of the monetary policy.

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