CPI Inflation: Is It Transitory? RBI Study Forces A Rethink
Is inflation transitory? Is it not?
The central bank has maintained that retail inflation is transient. It has even revised its inflation forecast to 5.3% for the full financial year, from 5.7% projected in the last policy meet. Still, some of its own research is not comforting.
While headline inflation has fallen in recent months, mean inflation this year is higher, it is more broad-based, and characterised by greater volatility, according to the RBI's analysis in its the bi-annual Monetary Policy Report for October.
The characteristics of CPI inflation during the January-August 2021 period varied distinctly from the pattern seen over the past few years, according to the findings of the report, published on Friday.
First, the mean, or the average, rose to 5.3% for the January- August 2021 period, compared to 3.4% for the same duration between 2017- 2019.
This was accompanied by an increase in volatility. The standard deviation- that measures the distance from the mean, was twice as much in 2021, compared to the same period between 2017-2019.
These indicate high dispersion of inflation rates in the CPI basket, along with a larger number of items experiencing higher inflation rates than in the pre-pandemic period.Monetary Policy Report
During April-August 2021, 8 of the 23 sub-groups in CPI with a cumulative weight of 49.7% contributed 82.7% of CPI inflation, the analysis found. This was much higher in comparison to contribution of 56.2% in 2020-21.
Yet another study of the diffusion or spread of inflation indicated that price increases are becoming broad-based across the CPI basket.
Findings by the central bank are mirror an analysis by JPMorgan's Sajjid Chinoy, Toshi Jain and Gopal Kumar, published in BloombergQuint ahead of the MPC's review. The analysis had found that headline inflation is not being driven by a few outliers but reflects a more broad-based price pressures.
The central bank, as part of its analysis, also excluded a fixed set of components from the CPI basket that display volatile price movements. The exclusion-based measure too, "showed heightened inflationary pressures over the last six months with no decisive signs of softening."
To be sure, by trimming out inflation outliers, the central bank did find an ebbing of underlying inflation pressures in August from the June-July peak.
What Drove Inflation?
In terms of contribution of goods and services to headline inflation, the pick-up in inflation in June 2021 emanated from perishables, like edible oils, fruits and vegetables, and semi-perishable goods, like LPG, kerosene, petrol, diesel, medicines and fast-moving consumer goods.
In July-August, the contribution of perishables to headline inflation registered a sharp moderation, even as the contributions of semi-perishables, durables and services to headline inflation was largely steady.
The surge in international prices of edible oil, silver and petroleum products resulted in an increase in the contribution of imported components to headline inflation from 0.8 percentage points in February to a peak level of 1.9 percentage points in June before moderating to 1.4 percentage points in August 2021.