The fine print of October inflation data, in three charts

Photographer: Dhiraj Singh/Bloomberg
Photographer: Dhiraj Singh/Bloomberg


  • The play of price pressures and base effect in coming months could keep the monetary policy committee on its toes until its trajectory towards the medium-term aim of 4% becomes clear, economists said.

India’s retail inflation is on a downward trajectory, with the print falling to a four-month low of 4.87% in October from the most recent high of 7.44% in July. However, there is little reason to cheer as price pressures have increased for the first time in three months. On a month-on-month basis, the Consumer Price Index (CPI) increased 0.65%, after having declined 0.05% in August and 1.13% in September. This shows that prices were firmer in October compared to the previous month. More worryingly, the major sequential rise came from the food segment, the index for which rose 1.06% (including a substantial 3.38% rise in vegetables) after two months of decline.


Despite the rise, food and vegetable inflation have moderated on a year-on-year basis due to a favourable base effect (last year, prices had risen at a faster rate in these months). However, going forward, the overall base will turn unfavourable until December. That means, even without any change in prices, inflation will rise to 4.99% in November and 5.46% in December, Mint calculations show. While prices tend to decline in November and December following the arrival of kharif crops in the market, the adverse base “will somewhat restrict the downside to inflation for two months", according to Crisil.

The play of price pressures and base effect in the coming months could keep the monetary policy committee (MPC) on its toes until its trajectory towards the medium-term aim of 4% becomes clear, economists said.


Food fury

What is keeping inflation still elevated is the higher prices of food items even as core inflation, which excludes food and fuel, has been consistently easing. While spikes in vegetable prices (tomato prices in June and July) had made the situation worse temporarily, stickiness in some other food prices have become a cause of concern, especially in the context of low production in the country due to lower-than-expected rainfall. Prices of cereal and related products have eased but remain in double digits, and the bigger worry is the sharp rise in prices of pulses, which continue to escalate, with their inflation touching a near three-and-a-half year high of 18.79%. Inflation for spices continues to remain as high as 22.76%. Eggs and fruit inflation have escalated to 9.3% in October, recording a sharp rise compared to the previous months. The stickiness of food items other than vegetables has not only proven a headache for the central bank’s rate-setting panel but also for the common public ahead of the general elections scheduled next year.

Moreover, the prices of some of the food items such as pulses, sugar and cereals are still rising. While any possible effect from the downward recovery in tomato prices has faded now, a surge in onion prices is spelling trouble now.


False alarm?

After tomatoes became the lead villain in inflation going past the 7% mark earlier this year, it’s now the turn of onions. The commodity began witnessing inflation from June, coming off a 21-month deflationary period. In October, onion prices rose 42% year-on-year. Despite a miniscule weightage of 0.64% in the CPI basket, onions are notorious for adding volatility to headline inflation. In December 2019, they alone had lifted the headline figure by over 200 basis points. In October, onions added 27 bps and could continue to be an upward force to inflation in November—but only for some time. “The onion price-driven surge in headline inflation is unlikely to last, as similar episodes have typically lasted for 2-3 months, before reversing," said Nomura in a report on Monday. “The bigger challenge is the intermittent food price shocks that keep pushing headline inflation higher—as is likely in November—and the risk that this may influence inflation expectations," it added.


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