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CPI Inflation Soars To 17-Month High Of 6.95%

Retail inflation rose to the highest since November 2020, led by a rise in prices of food items.

<div class="paragraphs"><p>Indian rupees exchange hands for fuel for a motorbike at a Bharat Petroleum Corp. gas station in Hyderabad, India, on Wednesday, March 23, 2022. Photographer: Dhiraj Singh/Bloomberg</p></div>
Indian rupees exchange hands for fuel for a motorbike at a Bharat Petroleum Corp. gas station in Hyderabad, India, on Wednesday, March 23, 2022. Photographer: Dhiraj Singh/Bloomberg

Retail inflation rose to the highest since October 2020, led by a rise in prices of food items. Fuel prices, which were raised towards the end of March, are not fully captured in the current data suggesting that inflation may remain elevated.

Consumer Price Index inflation stood at 6.95% in March 2022 compared to 6.07% in the preceding month, according to data released by the Ministry of Statistics and Programme Implementation on Tuesday. Month-on-month, it rose 0.96% in March.

Inflation in food and beverages rose 7.47% in March 2022 compared to 5.93% in February.

Core inflation, excluding food and fuel, rose to 6.53% in March, compared to 6.22% in February, according to Bloomberg. This is the highest since June 2014.

A Bloomberg poll of 35 economists had estimated inflation at 6.4%.

Retail inflation has exceeded the Monetary Policy Committee's upper target for the third straight month and has led to pivot in monetary policy, with the central bank once again choosing to focus on reining in inflation after having prioritised growth over the past two years.

For the ongoing fiscal year, the RBI raised it's inflation projection to 5.7% for FY23 from 4.5% earlier, assuming crude oil prices at $100 per barrel on an average.

CPI inflation shot up well beyond our expectations, led predominantly by a sharper than anticipated surge in some components of food and beverages such as meat and fish, Aditi Nayar, chief economist at ICRA said. Most other components printed broadly in line with forecasts, suggesting that a gradual pass through of the commodity price pressures has commenced, she added.

Rajani Sinha, chief economist at Care Edge, said that the supply disruptions and shipping delays due to the ongoing Russia-Ukraine geopolitical rift have sent food, edible oils, fertilisers and crude oil prices to all-time highs in the international markets. Further, the pass-through of elevated global oil prices to the transport sector could indirectly affect prices of other commodities, adding to the core price pressures, she said. "Against this backdrop, we expect retail inflation to be close to the upper band of RBI’s target range in the coming months."

  • Inflation in oils and fats was at 18.79% in March compared to 16.4% in February.

  • Vegetable prices rose 11.64% compared with an increase of 6.13% in the previous month.

  • Pulses inflation was at 2.57% compared to 3.02% in February.

  • Clothing and footwear inflation was at 9.40% compared with 8.86% a month ago.

  • Housing inflation stood at 3.38% compared with 3.6% the previous month.

  • Fuel and light inflation stood at 7.52% against 8.7% in February.

What's Behind The Spike?

On a sequential basis, inflation in food and beverages rose by 1.3% in March, led by a spike in prices of oils, along with meat and fish.

While prices of oils rose by 5.3% month-on-month, prices of meat and fish rose by 5.03%. Fruits too saw a sequential price rise of 2.5% month-on-month, while cereals, milk and spices saw a modest rise.

Vegetable prices fell 1.6% over a month ago and prices of eggs were lower by 4.6%.

Beyond food and beverages. most of the commodity groups touched multi months highs.

On an annual basis, inflation in clothing, footwear, and household goods and services was the highest in over 100 months, according to Sunil Kumar Sinha, principal economist at India Ratings & Research.

Inflation in items of personal care saw the sharpest monthly rise of 1.7%, possibly led by prices of gold ornaments. Inflation in clothing and footwear rose 0.88% on a sequential basis, while prices of household goods and services are up 0.6% since February.

In addition, health and household goods and services inflation is turning structural, said Sinha. Health inflation has stayed above 6% for the last 15 months and household goods and services inflation has been above 5% in the last 10 months, Sinha added.

Going forward, with the increase in cost of essential medicines from April 2022, health inflation is likely to to exert further pressure on retail inflation, he added.

Will Rate Hikes Be Pushed Up?

With the MPC having signaled an imminent stance change, the rate hike cycle may begin as early as June 2022, if the next CPI inflation print doesn't significantly cool off from the March 2022 level, Nayar said. "We now expect to see 50-75 basis points of rate hikes by the end of Q2 FY23, followed by a pause in the second half of FY23, she added.

With the CPI inflation surging in March 2022, the 10-year government bond yield is expected to cross 7.2% imminently, Nayar said.