October CPI inflation tapers to 6.77% on lower food inflation

India Consumer inflation (CPI Inflation) for the month of October 2022 came in marginally higher than street expectations at 6.77%. The good news is that, on a sequential basis, CPI inflation fell by 74 basis points. However, not all is hunky-dory. October is the 37th successive month CPI inflation is above 4%; which is the RBI median target for inflation. This is also the 10th month in a row, when CPI inflation is above the upper tolerance limit of 6% set by the RBI. While WPI inflation has give some room to cheer, the CPI inflation is just down 102 bps from the peak, so the RBI has a lot to explain to the government.

Data Source: MOSPI, Reuters Estimates

Two important drivers of CPI inflation have been food inflation and core inflation. On the positive side, food inflation fell by 159 basis points from 8.60% to 7.01%. Core inflation (which is the residual inflation excluding food and fuel) fell by 40 bps to 5.9% in October 2022. What the RBI would find gratifying is that this 6.77% inflation reading is on a 4.48% base. Obviously, as we go ahead, the higher base should help improve the inflation reading. One concern is that rural inflation is more strident than urban inflation and that is leading to a loss of purchasing power in rural India, which is visible in the woes of FMCG companies.

Real issue is sticky rural inflation

One of the downsides of lower than expected Kharif output this year is the spike in cereals inflation. Headline cereals inflation stands at 12.08%, but cereals inflation in rural India is at 12.66% compared to just 10.86% in urban India. More than the trend, look at the components of inflation and you will see the rural stress. For instance, rural food inflation fallen from 8.53% to 7.30% over last month while the headline rural inflation has also fallen from 7.56% to 6.98. However, out of the CPI inflation of 6.77% for October 2022, rural India was at 6.98% while urban India was 6.50%. Rural food inflation stands at 7.30% against urban food inflation at 6.53%. Clearly, rural India is still bearing the brunt of inflation.

Some prices in rural India are rising and that is a problem. But some prices are lower in rural India and that is a bigger problem. Let us explain. It must be noted that rural inflation is lower than urban inflation in products like footwear, healthcare, recreation, transportation and education. Why is this a problem. Much of this lower inflation in select products is coming from weak demand and this weak demand is due to a combination of lower income levels and lower purchasing power due to higher food inflation in rural India. Clearly, that is becoming a knotty and vicious problem in rural India from a policy perspective.

One word on the nature of food inflation in October 2022 overall. Meat and fish inflation is higher at 3.08% while eggs saw negative inflation of -0.18% while oils and fats were subdued at -2.15%. Inflation in mild is high at 7.69%. Somewhere along the way, bare necessities like cereals and milk are more expensive while lower inflation in many cases is more a signal of weak demand in rural areas. Foodgrain output has been hit by erratic monsoons this year and a weak Kharif but the bet is that full reservoirs should result in a better Rabi crop.

Now, RBI must talk more growth and less inflation

For some time now, RBI has been in a dilemma because inflation was not coming down but growth was suffering. It was a choice between inflation and stagflation. The latest inflation number, combined with lower US inflation, should give some comfort to the RBI. The missive is that inflation is coming down in a decisive manner and the time may be ripe for the RBI to plan a shift in its stance that is more biased towards economic growth.

In the last meeting of the MPC, Jayanth Varma and Ashima Goel had hinted that it was perhaps the time to talk less about inflation and more about growth. RBI has done its bit bringing down inflation and toning down inflation expectations. Now, market forces must take over. GDP growth really cannot happen amidst high input inflation, high interest rates and tight liquidity. It is time for the RBI to make a shift in stance, even if the rate hikes continue in the December MPC meet. That would give a lot more confidence to the economy.