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CPI inflation at 7% YoY in Mar’22, above expectations

High inflation and low growth to make policy choices difficult

CPI-based retail inflation stood at a 17-month high of 7% YoY in Mar’22 compared to 6.1% YoY in Feb’22. The number is higher than our forecast of 6.5% and Bloomberg survey of 6.4% YoY.

‘Vegetables’ registered a 16-month high inflation of 11.6% YoY in Mar’22. Excluding vegetables, CPI inflation stood at 6.6% YoY last month (higher than our forecast of 6.3% YoY). Additionally, all items within food, except ‘eggs’, registered higher inflation in Mar’22 as compared to Feb’22. Therefore, food inflation – the key driver of higher inflation – came in at a 16-month high of 7.7% YoY in Mar’22 as against our forecast of 6.6% YoY.

What’s also concerning is that core inflation is at a 92-month high of 6.5% YoY in Mar’22 (inline) after remaining sticky at 6.2% YoY in the preceding five months. Inflation in ‘miscellaneous’ items increased to 7.1% YoY in Mar’22. The same in ‘clothing and footwear’ rose to a 102-month high of 9.4% YoY in Mar’22. Inflation in ‘housing’, however, inched down marginally to 3.4% YoY in Mar’22 from 3.6% YoY in Feb’22.

Separately, IIP growth stood at 1.7% YoY in Feb’22, way lower than our forecast and Bloomberg consensus of ~3% YoY. The moderation in IIP was largely on account of the fastest contraction in 19-month in the production of consumer goods in Feb’22. This indicates weak consumption in the economy. Even growth in the production of capital goods moderated in Feb’22. Overall, manufacturing activity grew only 0.8% YoY in Feb’22 v/s 1.3% YoY in Jan’22. Mining and power generation, on the other hand, grew faster in Feb’22 v/s Jan’22.

Going forward, CPI inflation may stay at 7% YoY in Apr’22, before it eases towards 6.2%/6.3% YoY in May’22/Jun’22. Our revised forecasts suggest average inflation of 6.2% YoY in FY23, with inflation at or above 6% YoY in all months of the fiscal. Simultaneously, growth is likely to remain weaker-than-consensus, which will make it very difficult for the RBI to hike the policy repo rate aggressively. Overall, we expect two-to-three repo rate hikes in FY23, with the first one in Aug’22 (although one in Jun’22 will be a close call).

CPI inflation at a 17-month high in Mar’22…: CPI-based retail inflation came in at an alarming rate of 7% YoY in Mar’22 as compared to 6.1% YoY in Feb’22. The number is higher than our forecast of 6.5% and Bloomberg survey of 6.4% YoY. With this, CPI inflation in FY22 now stands at 5.5% YoY, lower than 6.2% YoY in FY21, but higher than the average inflation of 3.9% YoY over FY18-20.

…on account of higher-than-expected food inflation: Vegetables registered a 16-month high inflation of 11.6% YoY in Mar’22 as against 6.1% YoY in Feb’22. Excluding vegetables, CPI inflation stood at 6.6% YoY last month (higher than our forecast of 6.3% YoY). Additionally, all items within food, except eggs, registered higher inflation in Mar’22 vis-à-vis Feb’22. Therefore, food inflation – the key driver of higher inflation – came in at a 16-month high of 7.7% YoY in Mar’22 as against our forecast of 6.6% YoY. On the contrary, ‘fuel and light’ (CPI weightage of 6.8%) inflation stood at a year-low of 7.5% YoY in Mar’22.

Core inflation at a near eight-year high in Mar’22: What’s also concerning is that core inflation is at a 92-month high of 6.5% YoY in Mar’22 (inline) after remaining sticky at 6.2% YoY in the preceding five months. Inflation in miscellaneous items increased to 7.1% YoY in Mar’22. The same in clothing and footwear rose to a 102-month high of 9.4% YoY in Mar’22. Inflation in housing, however, fell marginally to 3.4% YoY in Mar’22 from 3.6% YoY in Feb’22.

Policy choice likely to get very difficult: Going forward, CPI inflation may stay at 7% YoY in Apr’22, before it eases towards 6.2%/6.3% YoY in May’22/Jun’22. Our revised forecasts suggest average inflation of 6.2% YoY in FY23, with inflation at

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