Food Inflation-Consumer Price Index highest since 2014-worse than expected

Food inflation and the Consumer Price Index (CPI) for April have both turned out to be worse than expected. Powered by high fuel and food costs, headline inflation faced by Indian consumers shot up to a nearly eight-year high of 7.8% in April from 6.95% in March. This is the highest since May 2014.

As data released by the National Statistical Office on Thursday showed, the numbers are worse than expected by various economic predictions. The industrial output too grew at a mere 1.9% in March.

Consumer Price Index: The Inflation Trend

December 2021: 5.59%

January 2022: 6.01%

February: 6.07%

March: 6.95%

April: 7.79%

While rural inflation was seen accelerating to 8.4% while their urban counterparts experienced an inflation of 7.1%. Anything above 6% is considered above the Reserve Bank of India (RBI) comfort zone though the mid-point set by the central bank is 4 %.

Food, weighted at 39%, is the most volatile component and is seen to be one of the biggest movers of CPI inflation. Food inflation is expected to be driven by the rising costs of production, surging international crop prices, and extreme weather-related disruptions. Prices of wheat and sugar (India’s major exports) and vegetable oils (a major import) have skyrocketed in the wake of the Russia-Ukraine war. The recent ban on palm oil exports by Indonesia is likely to make already expensive edible oils even costlier.

The flip side of India becoming a wheat exporter catering to demand from markets like Turkey and Egypt is seen in the rising domestic prices. “Higher wheat prices have been due to a higher diversion of wheat for exports. This is the cause of shortage within the country and contributed to significant food inflation of 8.4%. Even the inflation of cereals is high due to the higher prices of wheat,” said Madan Sabnavis, Chief Economist at the Bank of Baroda. Pointing to fuel and lighting that came with high inflation of 10.8% in April, the economist observed that only a possible reduction in taxes and duties by the government will lead to a cooling off of price pressures.

Other interesting data points included cereals and products (21 months high), vegetables (17 months high), and spices (17 months high), consumer food price inflation jumped to 8.38% (17 months high), according to NSO data. Inflation in transport and communication rose nearly 11% in April from 8% in March. Likewise, food and beverages inflation sped up from 7.47% in March to 8.1% in April. A sharp rise in vegetable inflation saw it go from 11.6% in March to 15.4%, even as the price rise in oil and fats eased marginally to 17.3% from 18.8% in March. Meat and fish inflation also cooled a bit from 9.63% in the previous month to about 7% in April. Costs of clothing and footwear saw combined inflation of 9.85% in April up from 9.4% in March, with footwear prices rising at 12.12% and clothing costs by a sharp 9.51%.

Economists said that the April inflation numbers were not just sharper than March but also above their expectations of 7.5%. As core inflation surged to 7.0 percent from 6.4 percent in March, the repo rate being raised again on June 8 is being seen as quite a possibility. “This is definitely not good news. And it makes the possibility of yet another aggressive rate increase by RBI in June. Right now, we are calling for 45 basis points of increase in the June policy meeting, but I won’t be surprised if there is a larger hike than what is being considered at this juncture given the extremely ugly numbers that we have before us today,” another economist with a leading private sector bank said.

The upward shift in the inflation trajectory is expected to continue with at least three consecutive quarters of CPI inflation remaining above 6%. And if this happens, in about four months, the Monetary Policy Committee is mandated to write to Parliament explaining the reasons. “The next at least six readings appear to be closer to seven percent or so. Plus, or minus a little which is really discomforting I would say,” said another analyst adding that the descent is going to be fairly slow and long.

Rating agency CRISIL summed up the situation and said that the Indian economy may have won the rounds against COVID-19, but there’s a new opponent in the ring now — rising prices — which are threatening to deliver a one-two punch. “Such persistent inflation, including the rising core part, is set to become the biggest headwind to India’s economic recovery this fiscal. CPI-linked inflation may have spent three years at above 4%, the mid-point of the target range set by the Reserve Bank of India (RBI). But it is set to become broad-based across most goods and services this fiscal, ominously rising to 6.3% in fiscal 2023,” the rating agency said.

April also marked the fifth month in a row where the Index of Industrial Production (IIP) growth recorded lower than 2%. The output of electricity generation and mining grew 6.1% and 4.5%, respectively. The production of consumer durables continued to shrink for the sixth month in a row. The sector contracted 3.2% in March, just as consumer output for non-durables dropped 5%, for the third consecutive month.

Areas that showed promise were infrastructure and construction goods which saw a 7.3% rise, just as primary goods rose 5.7%. Capital goods and intermediate goods output rose a mere 0.7% and 0.6%, respectively marking the slowest pace of growth for capital goods in three months. This prompted Sabnavis to comment that the disappointing numbers indicate that the investment cycle is yet to kick off and is only likely to be delayed further owing to the war and prevailing uncertainties.