On January 12, the National Statistical Office (NSO) reported that retail inflation, as measured by the Consumer Price Index (CPI), was 5.7% in December 2022. On January 16, the ministry of commerce and industry reported that Wholesale Price Index (WPI) for the month of December was 4.95%. The latest CPI and WPI values are the lowest in 12 and 22 months respectively. What is the larger inflation picture in the Indian economy? Here are four charts that explain this in detail.
Inflation seems to have peaked...
December 2022 is the third consecutive month of decline in CPI and the seventh consecutive month of decline in WPI. This suggests that inflation, both at the retail and wholesale level – the composition of CPI and WPI baskets differs significantly – has already peaked and it is on a declining trajectory now. What is noteworthy is the fact that both WPI and CPI have seen a small month on month contraction in both November and December 2022. While simple sequential (month on month) comparisons cannot factor in seasonal factors in prices, this does suggest that some prices have come down even in absolute terms.
See Chart 1: Annual CPI and WPI
...And MPC overestimating inflation every quarter this fiscal suggests that it has peaked earlier than expected
RBI’s Monetary Policy Committee (MPC) comes up with its quarterly retail inflation forecast every two months. A comparison of MPC’s inflation projections shows that it overestimated inflation in its immediate projections (for example June 2022 MPC projection of June 2022 quarter inflation) for all three quarters this fiscal year. This raises a question whether the MPC has erred on the side of caution in making its inflation projections. To be fair to the MPC, seasonal and not economic factors have played a bigger role in the recent moderation in inflation numbers. The following discussion explains this in detail.
{{/usCountry}}RBI’s Monetary Policy Committee (MPC) comes up with its quarterly retail inflation forecast every two months. A comparison of MPC’s inflation projections shows that it overestimated inflation in its immediate projections (for example June 2022 MPC projection of June 2022 quarter inflation) for all three quarters this fiscal year. This raises a question whether the MPC has erred on the side of caution in making its inflation projections. To be fair to the MPC, seasonal and not economic factors have played a bigger role in the recent moderation in inflation numbers. The following discussion explains this in detail.
{{/usCountry}}See Chart 2: MPC projection and actual inflation
However, retail inflation picture looks less comforting as far as non-food prices are concerned...
Moderation in food prices has played a big role in bringing down headline WPI and CPI. Retail food inflation – it has a weight of 39% in the CPI basket – has fallen from 8.6% in September 2022 to 4.2% in December 2022. Wholesale food inflation – it has a weight of 24.4% in the WPI basket – has come down from 8% in September 2022 to 0.7% in December 2022. However, once food prices are factored out, the inflation picture, especially on the retail front, looks relatively less comforting, as is shown in the chart below. While non-food WPI has come down from 11.6% in September 2022 to 6.7% in December 2022, non-food CPI has actually increased marginally during this period.
See Chart 3: Non-food CPI and WPI
...And even within food, vegetables have played a big role in bringing down prices.
To be sure, the decline in food inflation should not be seen as a proof of overall decline in food prices. A disaggregated analysis of CPI data shows that disinflation in vegetable prices is the biggest factor which is driving food prices down. Of the nine sub-categories of CPI food, only vegetables – they have a share of 15.5% in the CPI food basket – saw prices come down on an annual basis in December. For all other sub-categories except fruits, monthly inflation has actually increased in the last two months. Inflation in the cereals and products sub-category stood at 13.8% in December, the highest since August 2013.
See Chart 4: Food CPI sub-categories in December 2022
This is why experts are divided over RBI’s future course of action
The immediate policy question, as far as inflation is concerned is whether MPC will raise interest rates for the sixth consecutive time in its February meeting. While SBI’s chief economist Soumya Kanti Ghosh has argued against increasing interest rates any more, many others such as Pranjul Bhandari at HSBC and Rahul Bajoria from Barclays see a 25 basis point hike in the February MPC meeting.