MENU

Published on 14/01/2020 8:49:23 AM | Source: Motilal Oswal Services Ltd

CPI inflation way above expectation in Dec`19 - Motilal Oswal

Posted in Economy News| #Economy #Motilal Oswal #CPI

Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel  https://t.me/InvestmentGuruIndia 

Download Telegram App before Joining the Channel

Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel https://t.me/InvestmentGuruIndia 

Download Telegram App before Joining the Channel

 

CPI inflation way above expectation in Dec’19

Forget about rate cuts, are rates hikes likely?

* CPI-based retail inflation shot up to a 67-month high of 7.4% in Dec’19 from 5.5% a month ago. The number was way higher than our estimate of 6.5% and consensus of 6.7%. With this, CPI inflation stands at 5.8% for 3QFY20 – the highest in 21 quarters.

* Food inflation accelerated to over six-year high of 14.1% in Dec’19 (our estimate: 12.4%) from 10.0% in the previous month, driven primarily by ‘vegetables.’ All other food items too exhibited higher inflation in the month. Vegetables inflation rose to a 73-month high of 60.5% in Dec’19 v/s 36.1% a month ago (our estimate: 55%). In fact, CPI inflation excluding vegetables was at 4.1% in Dec’19 – the highest in 14 months.

* Core inflation (inflation in ‘housing, ‘clothing and footwear’ and ‘miscellaneous’ combined) also accelerated to 3.7% in Dec’19 from 3.5% a month ago. This can be attributed to higher inflation in ‘clothing and footwear’ and ‘miscellaneous’ items as ‘housing’ inflation slowed in the month.

* Inflation in ‘core services’, which had been consistently trending down in the last 11 months, also changed direction in Dec’19. It came in at 4.0% v/s 3.5% a month ago, primarily led by higher inflation in ‘transport and communication’, ‘recreation’ and ‘personal care’ services.

* Multi-month-high CPI inflation excluding vegetables is worrisome. Even if we assume a decline of 5% MoM in vegetable prices in the next two months, headline inflation will remain at ~7%. Therefore, likely headline inflation of ~5% throughout CY20 is more concerning – it would then confirm that rate cuts are a thing of the past. In addition, although it is still an exaggeration to assume India is in stagflation as growth is still more than 4%, discussion over rate hikes might gather steam. Considering it in the backdrop of lower savings, the case for rate hikes strengthens even more.

 

I. Retail inflation at 67-month high in Dec’19

* CPI inflation rises in Dec’19…: CPI-based retail inflation shot up to a 67-month high of 7.4% in Dec’19 from 5.5% a month ago (Exhibit 1). The number was way higher than our estimate of 6.5% and consensus of 6.7%. With this, CPI inflation stands at 5.8% for in 3QFY20 – the highest in 21 quarters (Exhibit 2).

* …led by higher food inflation: Higher inflation can be primarily attributed to food inflation, especially vegetables. Vegetables inflation inched up to a 73- month high of 60.5% in Dec’19 from 36.1% a month ago (our estimate: 55%). All the other items within food too exhibited higher inflation v/s a month ago. Overall, food inflation rose to 14.1% in Dec’19 from 10.0% in Nov’19 (higher than our estimate of 12.4%). In fact, CPI inflation excluding vegetables was at 4.1% in Dec’19 – the highest in 14 months. Additionally, ‘fuel and light’, which has been in deflation since the past five months, also reversed trajectory and registered inflation of 0.7% in Dec’19.

* Core inflation rose in Dec’19: Core inflation (inflation in ‘housing, ‘clothing and footwear’ and ‘miscellaneous’ combined) rose to 3.7% in Dec’19 from 3.5% a month ago. The rise was led by higher inflation in ‘clothing and footwear’ and ‘miscellaneous’ item as ‘housing’ inflation slowed during the month (Exhibit 3). Housing inflation fell to 4.3% in Dec’19 v/s 4.5% a month ago. Higher inflation in ‘miscellaneous’ items was entirely led by ‘transport and communication’ and ‘household goods and services’. Core inflation in 3QFY20, however, was still lower at 3.6% v/s 4.1% a quarter ago (Exhibit 4).

* Inflation in ‘core services’ changes direction: Inflation in ‘core services’, which had been consistently trending down in the last 11 months, also changed direction in Dec’19. It came in at 4.0% v/s 3.5% a month ago (Exhibit 6), primarily led by higher inflation in ‘transport and communication’, ‘recreation’ and ‘personal care’ services.

* End of RBI’s monetary easing cycle:Multi-month-high CPI inflation excluding vegetables is worrisome. Even if we assume a decline of 5% MoM in vegetable prices in the next two months, headline inflation will remain at ~7%. Therefore, likely headline inflation of ~5% throughout CY20 is more concerning – it would then confirm that rate cuts are a thing of the past. In addition, although it is still an exaggeration to assume India is in stagflation as growth is still more than 4%, discussion over rate hikes might gather steam. Considering it in the backdrop of lower savings, the case for rate hikes strengthens even more

 

To Read Complete Report & Disclaimer Click Here

 

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

 

Above views are of the author and not of the website kindly read disclaimer