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Base effect drives inflation higher…

CPI Inflation (February)  5.03% YoY

Key readings

* CPI inflation rose to 5.03% in February 2021 compared to 4.06% in January 2021, reversing the declining trend of the last three months primarily because of the negative base effect of last year

* The rise in inflation is primarily driven by YoY increase in food inflation, which increased to 4.25% in February compared to 2.6% in January 2021. Core inflation has also risen to 5.89% in February compared to 5.66% in January

* The sequential rise in headline CPI inflation was limited to 0.19% against rise of almost 1.0%. The sequential rise in food and beverages inflation was (-) 0.44%. However, the cause of concern is rise in core inflation which is increasing even sequentially. On an MoM basis, core inflation rose 0.5% due to a rise in almost all its components with higher contribution from fuel & light (LPG prices) and transport & communication (petrol prices)

* Within food inflation, oils and fats, fruits, non-alcoholic beverages and prepared meals saw a rise in inflation. Other than these, other items saw a decline in prices

* Core inflation at 5.89% is now highest since October 2018 as an across the board sharp rise in global commodity prices is putting pressure on almost all its components. Clothing & footwear, health, transport & communication, recreation & amusement, was higher

* While food inflation may remain well behaved over the next few months given higher food grain production and favourable base from April, core inflation will be keenly watched by market participants

* The recent sell-off in the Indian bond market is primarily driven by higher government borrowing and sell-off in global bond markets and has less to do with change in inflation expectations. The trend is likely to continue with RBI likely to keep benchmark rates on hold in the near term while the bond market will be more focusing on RBI intervention and global debt market movement

Looking deeper…

* Core inflation: Concern on rise in global commodity prices. Core inflation has been sticky since June 2020 at ~5.4-5.8% range with the recent print moving slightly higher at 5.9%. Recently rise was seen across its components that is a cause of concern in the near term. However, reduction in gold prices is providing some comfort

* Food inflation: Not a cause of worry in near term. Except few items, food inflation does not seem to be a cause for concern. Cereals & products inflation was at (-) 0.35%, lowest since January 2015 (since new series). Currently, higher inflation in items like meat & fish, eggs, milk & products, pulses & products should decline, going forward. Base effect is also turning favourable again from April onwards

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