Vegetable, cereal prices push inflation to 7.41%

Updated on Oct 13, 2022 01:18 AM IST

Retail inflation, as measured by the Consumer Price Index (CPI) grew at 7.41% in the month of September, largely in line with the 7.36% forecast by a Bloomberg poll of economists, but significantly higher than the 7% reading for the month of August.

Representational image
Representational image
By, New Delhi

Retail inflation rose to 7.41% in September on the back of higher food prices, and factory output in August surprisingly contracted by 0.8% primarily on account of the monsoon rain (which affects industries such as mining and construction), and lower exports on account of a global economic slowdown.

Both numbers were released by the National Statistical Office (NSO) on Wednesday, a day after the International Monetary Fund (IMF) reduced India’s 2022-23 growth forecast by 60 basis points to 6.8% –this is lower than the RBI’s forecast of 7%, although the country remains the fastest-growing large economy in a depressed global scenario – and seemed to confirm the grim prognosis.

Retail inflation, as measured by the Consumer Price Index (CPI) grew at 7.41% in the month of September, largely in line with the 7.36% forecast by a Bloomberg poll of economists, but significantly higher than the 7% reading for the month of August. The Index of Industrial Production (IIP) – 77% of the index tracks manufacturing activity – contracted by 0.8% in the month of August, negatively surprising a Bloomberg forecast of economists which had projected a 1.7% growth.

Given the fact that food prices are an important driver of the recent reversal in inflation trajectory –headline CPI fell for three consecutive months till July 2022 – experts believe that the government’s dilemma between deploying already scarce fiscal resources to alleviate the growing pain of food prices or risking a wage-price spiral will only become more difficult to handle. The contraction in IIP – it is the first since February 2021 – when read with moderation in Purchasing Manager’s Index (PMI) for manufacturing in the month of August and September, also suggests that the RBI’s Monetary Policy Committee’s (MPC) projection about the economy doing better than expected (compared to its August forecasts) in the September, December and March quarters of the current fiscal might have stronger than envisaged downside risks. The September 30 MPC resolution projected a growth rate of 6.3%, 4.6% and 4.6% for the second, third and fourth quarters of the current fiscal compared to its 6.2%, 4.1% and 4% forecast in August. The headwinds to growth could gain further momentum if the latest surge in inflation forces RBI to administer bigger rate hikes, which experts believe cannot be ruled out.

Annual growth in CPI in the month of September was 7.4%, 40 basis points – one basis point is one hundredth of a percentage point – higher than the August reading of 7% and the highest monthly CPI value since April when it stood at 7.8%. Food inflation, which accounts for 39% of the CPI basket, stood at 8.6% in September, almost a percentage point higher than its 7.62% value in August. While vegetable prices have played a role in driving up food inflation with a subcategory inflation print of 18%, the bigger worry on the food inflation front are cereal prices. The cereals and products subcategory has an inflation print of 11.5% in September, more than double of what it was in June. Inflation for two most important cereals, namely, non-PDS categories of rice and wheat stood at 9.2% and 17.4% in September. The September inflation print for cereals and products sub category is the highest since September 2013.

The numbers once again highlight the importance of the government’s enhanced free food programme – the supply of an additional 5kg of grain to around 800 million people – that was recently extended till the end of the year.

But the inflation in cereals is also cause for alarm – given the lower-than-expected wheat crop this year, and the likelihood that the paddy crop could also surprise expectations negatively.

“There are widespread fears that an erratic monsoon has adversely affected both the sowing of rice crops and whatever was sown. Coming on the back of a bad wheat crop, this means a shortage of staple food grain for the poor. Persistence of the inflationary trend in rice has the potential of triggering a wage-price spiral like the first half of the last decade”, said Himanshu an associate professor of economics at Jawaharlal Nehru University. “The only policy which can prevent this is a widening of the food security cover by continuing with schemes such as the PM Garib Kalyan Yojna, which will extract a significant fiscal cost,” he added.

Thus far, the government has spent 3.91 lakh crore on the scheme (including spending till December 2022) that has run uninterrupted since April 2020 except for a five-month hiatus between late 2020 and early 2021.

To be sure, the September inflation data also shows a minor spike in core inflation – it measures the non-food, non-fuel part of inflation – from 6% to 6.2%, which suggests that food prices are not the only factor driving up inflation.

The latest inflation reading also means that the RBI’s MPC will be sending a letter to the finance ministry explaining the reasons for its failure to deliver its mandate of keeping CPI within the target range of 2%-6% for the ninth consecutive month. Whether or not the contents of the letter are made public, will be the finance ministry’s decision.

In another set of statistics released by NSO, factory output suffered a contraction in the month of August for the first time after February 2021. While a 39.9% contraction in mining is a big reason for the headline index contracting, even manufacturing activity has seen a contraction of 0.7%, which suggests that factory output may be losing growth momentum despite possible festive demand tailwinds. A look at the industries which have suffered the biggest contraction in August – textile, leather products etc –suggests that a slowdown in export demand could have played a role in the contraction in manufacturing.

“High-frequency mandi prices indicate that prices of perishables could increase going forward as well. However, global commodities (ex-energy) on an average are easing, which, if sustained, should act as a moderating influence on headline inflation. But watch out for near-term offsetting factors which may come from food owing to unseasonal rains, sticky motor fuel prices, and higher kerosene prices, weakness of INR etc. With domestic demand fairly resilient so far, core CPI pressures may remain reasonably sticky in near-term sequentially. That said, lower imported inflation on net and base effect should directionally still imply lower inflation on Y-o-Y basis in 2HFY23 vs 1HFY23. But This will unlikely to derail the RBI’s tightening path as inflation still remains elevated,” said Madhavi Arora, lead economist, Emkay Global Financial Services.

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  • ABOUT THE AUTHOR

    Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.

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