Four charts to explain the inflation situation

The National Statistical Office (NSO) and Ministry for Commerce and Industry released the retail and wholesale inflation numbers for October on Monday. Here are four charts that explain the current inflation situation in the Indian economy.

The National Statistical Office (NSO) and Ministry for Commerce and Industry released the retail and wholesale inflation numbers for October on Monday. Here are four charts that explain the current inflation situation in the Indian economy.

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Headline inflation has fallen for both indices

Both retail and wholesale inflation show a fall in October compared to their respective September prints. While retail inflation, as measured by the Consumer Price Index (CPI) has fallen from 7.4% in September to 6.77% in October, wholesale inflation, measured by the Wholesale Price Index (WPI) has fallen from 10.7% in September to 8.4% in October. To be sure, the two inflation measures have had different trajectories in the past. While WPI has been falling continuously since June , CPI increased for the past two months before gravitating towards its July level of 6.71% in October.

See Chart 1: headline CPI and WPI growth

Core CPI inflation has not changed much

Because inflation is driven by both structural and seasonal factors, economists often look at various components of the inflation basket. One of the most common and useful differentiations while analysing inflation is to look at its core and non-core components. Core inflation measures the non-food, non-fuel part of the CPI basket. Food and fuel prices have a bigger seasonal component. A slightly long-term look at the trajectory of core and non-core components of the CPI basket shows that the latter has been a major driver of changes in the headline inflation number even as core inflation has remained relatively sticky and closer to the 6% mark. Data from Centre for Monitoring Indian Economy (CMIE) shows that core CPI declined marginally from 6.21% in September to 6.14% in October, whereas non-core inflation saw a bigger moderation from 8.87% in September to 7.44% in October.

See Chart 2: Core and non-core CPI

Shifting contours of food inflation

Food items have a share of 39% in the overall CPI basket. CMIE data shows that headline food inflation has come down from 8.6% in September to 7% in October . This headline number however, hides varying trends in prices of various food items. For example, inflation in the oil and fat category shows a 2.15% contraction in prices on an annual basis. This sub-category, which includes edible oil, was a major driver of food inflation with annual inflation staying in double digits for 26 consecutive months between April 2020 and May this year. The latest disinflation trend shows that prices have actually started coming down rather than there being a moderation in price growth. Prices of cereals, on the other hand, seem to be gathering momentum. CMIE data shows that inflation for the cereals and products category has increased from 5% in March to 12.1% in October. Among other important food items, inflation has increased for milk and milk products and meat, egg and fish while it has come down for vegetables and pulses.

See Chart 3: September and October inflation for important food items

Higher cereal prices will continue to test economic policy

Retail inflation for rice and wheat, two of India’s most important cereals stood at 10.2% and 17.6%, respectively in the month of October. These are the highest values for both since January 2015, the earliest period for which data is available in the CMIE database. Given the fact that cereals have a share of more than 50% in average consumption basket of poor households in India, a persistence of high inflation in staples can become a major problem, perhaps even leading to a wage-price spiral. The trend in prices of rice and wheat, when compared with negligible inflation for rice and wheat under the PDS category also underlines the criticality of the additional food support programme which the union government has been running as part of the Pradhan Mantri Graib Kalyan Yojna (PMGKY). The programme, which offers five kilogram of extra grain to every beneficiary of the National Food Security Programme, has entailed a fiscal cost of ₹3.45 lakh crore so far, and was extended for three more months on September 29. A withdrawal of the additional grain entitlements under PMGKY, given the high inflation for rice and wheat, will lead to a significant economic pain for poor households. Continuing with the programme with entail a significant fiscal commitment.

See Chart 4: Rice and wheat PDS and non-PDS inflation

It is over to the next MPC now

With the benchmark inflation number staying below the 7% mark -- something RBI governor Shaktikanta Das predicted while speaking at the Hindustan Times Leadership Summit on November 12 -- it remains to be seen whether RBI will deliver yet another rate hike in its next MPC meeting scheduled in early December. It has already hiked policy rates by 1.9 percentage points in its current monetary tightening cycle. Higher interest rates, notwithstanding the benefits of a stable inflation environment in the medium to long-term, are bound to generate headwinds for future growth in the short-term. Minutes of the previous MPC meeting on policy rates suggest that there was already a difference of opinion on the question of whether or not an interest rate hike was desirable. It will be interesting to see whether the MPC makes a change in its stance in December or delivers yet another front-loaded rate hike to boost its inflation targeting credentials.