Consumer inflation at 14-month high of 6.2%

October retail inflation hit 6.2%, the highest in 14 months, driven by rising food prices, likely delaying RBI rate cuts in December.

Retail inflation came in at 6.2% in October, the highest in 14 months, and outside the upper band of the Reserve Bank of India’s tolerance limit (6%), primarily on account of higher food prices with potatoes, onions and tomatoes, stape vegetables all, driving the charge.

The higher-than-expected number means that RBI’s Monetary Policy Committee is unlikely to cut rates in its December meeting. (Bloomberg)

The higher-than-expected number means that RBI’s Monetary Policy Committee is unlikely to cut rates in its December meeting, especially given RBI Governor Shaktikanta Das’s comments after the MPC’s October meeting.

“It is with a lot of effort that the inflation horse has been brought to the stable, i.e., closer to the target within the tolerance band compared to its heightened levels two years ago. We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under tight leash, so that we do not lose control”, he said then.

October’s inflation print of 6.2% is also 30 basis points – one basis point is one hundredth of a percentage point – more than what was projected by a Bloomberg poll of economists.

When read with the changed global environment because of Donald Trump’s election to the White House – Trump will take office in January 2025 – and the inflationary consequences of his proposed tariff war on the rest of the world, the future prospects of lower interest rates could weaken further.

This means that households servicing mortgage payments will have to wait longer for a relief on their EMI bills which could have generated a cushion for consumption demand in the economy.

As has been the case in the recent past, the latest spike in inflation numbers is primarily on account of food. Headline Consumer Price Index based inflation increased from 3.7% in August 2024 to 5.5% in September and 6.2% in October. Food inflation number for these three months are 5.7%, 9.2% and 10.9% respectively. Food has a weight of 39% in the CPI basket, something which will come down, when we have a new CPI series which still has 2011-12 as its base year.

To be sure, the numbers do show that even non food inflation has bottomed out in the economy and will generate additional tailwinds, rather than headwinds, for the headline print going forward. Core inflation, which captures the non-food non-fuel part of the CPI basket, came in at 3.65% in October, the highest this number has been since January 2024.

What exactly happened to food inflation between September and October?

PAT (potato-onion-tomato) is the major culprit with respective inflation prints of 64.9%, 51.8% and 161.3% leading to a rise in vegetable inflation from 36% in September to 42.2% in October. To be sure, one could make an argument that the primarily culprit is tomato which saw its inflation rising from 42.9% in September to 161.3% in October. Potato and onion inflation were actually lower than September’s reading of 65.2% and 66.1%. Prices of edible oil were another major reason for the spike in food and by extension, overall inflation in October. Inflation for the oils and fats category increased from 2.5% in September to 9.5% in October. At 3.56%, this category’s weight in the CPI basket is more than the combined weight of potatoes, onions and tomatoes at 2.19%.

“Though non-food inflation remains benign around 3%, the recurring flare-up in food inflation has kept headline inflation elevated and creates an upside risk to the inflation trajectory – restricting the easing in monetary policy,” said Dharmakirti Joshi, chief economist at CRISIL.

“We expect the MPC to hold rates steady in December, given the sharp rise in food inflation in September and October. That said, in our base case, we expect food inflation to ease this fiscal as kharif sowing has been healthy. Vegetable prices can correct sharply when fresh stocks enter the market. Accordingly, we expect the MPC to cut rates towards the end of this fiscal,” he added.

While the inflation numbers have come as a negative surprise to policy makers, another set of statistics released on Tuesday have brought some good news on the growth front. The Index of Industrial Production (IIP) which tracks activity in mining, manufacturing and electricity generation grew at 3.1% in September 2024 compared to a contraction of 0.1% in the month of August. To be sure, the August contraction might have the been the result of an adverse base effect. IIP growth in August and September 2023 was 10.9% and 6.3% respectively. Manufacturing, which accounts for more than three fourth of the IIP basket, grew at 3.9% in September compared to 1.8% in August. In the use-based categories, there was a broad-based improvement in growth with consumer goods categories recording the biggest improvement from a contraction of 0.5% in August to 3.9% growth in September.