CPI Inflation Rises To Three-Month High In February 

Retail inflation rose in February after falling for three consecutive months as food prices saw a modest bounce back.

Consumer Price Index inflation stood at 5.03% in February 2021 compared to 4.06% in January 2021, according to data released by the Ministry of Statistics and Program Implementation on Friday. Inflation in food and beverages rose to 4.25%, compared to a rise of 2.67% last month.

A Bloomberg poll of 33 economists had estimated inflation at 5% for February 2021.

The current inflation targeting framework expires at the end of March 2021. Retail inflation remained above the RBI’s target of 4(+/-2)% for eight months in the current financial year.

As expected, the January 2021 print for CPI inflation has turned out to be the bottom, with a sharp upturn in the subsequent month, led by food, fuels such as petrol and diesel, as well as core items, said Aditi Nayar principal economist at ICRA. Core inflation hardened to a three-month high, reiterating that an uptick in commodity prices, rising demand, and emerging pricing power will keep inflationary pressures intact, Nayar said.

Inflation Internals

• Inflation in cereals was at -0.35% in February compared to 0.1% in January. Vegetables prices fell 6.27% over a year ago compared to a year-on-year drop of 15.8% last month. Inflation in fruits rose to 6.28% compared to 4.7% in January.
• Inflation in transport and communication rose to11.36% compared to 9.32% in January.
• Clothing and footwear inflation was at 4.21% compared to 3.82% in January.
• Housing inflation stood at 3.23% compared to 3.25% last month.
• Fuel and light inflation stood at 3.53% compared to 3.87% earlier.
• Household goods and services inflation was at 3.07% compared to 2.8%.
• Health inflation rose to 6.33% from 6.02% earlier.

Fuel & Transport Remains Pain Point

High prices in fuel and light and in transportation and communication, continued to drive up inflation. While fuel and light index climbed to 152.4, the transport and communication index climbed to 145.1- both indices climbing to the highest since at least 2015. Both components together constitute 15.5% of the inflation basket.

While the first round impact of higher fuel prices on the CPI inflation is limited, the second round impact is substantially larger, said Nayar. Unless taxes on fuels are cut to a sizeable extent, inflationary pressures are likely to rule out further rate cuts, she added. Kaushik Das, chief economist at Deutsche Bank, estimates that if Brent prices were to average around $75 per barrel, it would result in about 20-basis-point direct impact on CPI inflation and along with a possible lagged indirect impact of 20-25 basis points, the overall incremental impact of fuel inflation on headline CPI would be about 40-45 basis points eventually.