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Low base lifts CPI; easing likely ahead

January CPI rose 30bp to 6%, broadly in line with estimates. Key trends: i) Food inflation jumped 110bp to 5.6%, entirely led by falling base; the underlying trend is very benign – cereal and milk inflation is quite contained while pulses, oils and meat/fish inflation is slowing. ii) core inflation, however, remained sticky at ~6% with goods and energy related inflation being high (>6%), reflecting higher commodity prices, while services remains contained under ~4%.

Inflation rise is tracking RBI’s trajectory and should moderate going ahead. Food inflation should ease with import duty cuts and rabi arrivals. Weak demand and easing WPI should eventually help core CPI ease. Although, an impending fuel price hike may delay the same.

Food inflation rises, but mainly owing to base effects

Food inflation jumped 110bp in January to 5.6%, which is entirely on account of a sharp ~100bp drop in the base period. The underlying trend, however, remains quite benign/falling across food commodities. Cereals and milk inflation is around 3-4%% (despite low base) and vegetables though up YoY (owing to base effects) are still contained at around 5% YoY basis. Meanwhile, inflation for pulses and eggs, meat and fish, which was in double digits through most of 2021, has eased to 3% and 5%, respectively. Finally, inflation in oils remains elevated at ~19%, but has started to ease. Going ahead, food inflation is likely to moderate as base effects pushing it higher fade and dynamics remains benign.

Core inflation remains elevated at ~6%

Core inflation continued to remain sticky around 6% and the underlying story remains the same. Higher input prices (commodities, etc) are clearly showing up in goods inflation (FMCG, textiles, etc), which is ruling in the range of 6.5-7% for some time. Energy and related services (transportation, etc) is also quite elevated at ~8% and may remain so as fuel prices could be hiked post state elections. However, inflation in services (housing, education, etc), which is a reflection of domestic demand, remains contained under 4%.

Inflation is broadly tracking RBI’s trajectory and should moderate

Inflation rise is largely tracking RBI’s trajectory and should moderate going ahead as base effects reverse. Going ahead, dynamics wise food inflation should remain contained owing to import duty cuts and rabi arrivals. Core inflation too should ease, as weak demand will keep services inflation contained and moderating WPI should ease goods inflation. However, the recent oil price rise may warrant fuel price hikes (post state elections) and could delay the disinflation to some extent.

Given that inflation is tracking RBI’s trajectory, we expect RBI to remain dovish. RBI’s challenges arise more from the external front (hawkish global central banks and rising oil prices). These are already resulting in vanishing BoP surpluses. Thus, in pursuit of supporting domestic growth and reining in bond yields, it may have to allow INR depreciation – not a bad choice, given that it is quite overvalued.

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