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CPI inflation overshoots estimates; WPI at a 25-year high in May’21

Data rules out further monetary easing

* Headline inflation came in at a six-month high of 6.3% YoY in May’21 – above Bloomberg consensus of 5.4% YoY and our expectations of 4.7% YoY – v/s 4.2% YoY in Apr’21. The release mentioned that market-wise prices reported for May’21 were 68.1%/67.5% for rural/urban markets.

* Food inflation too came in at a six-month high of 5% YoY last month v/s 2% YoY in Apr’21. Within food, only ‘cereals and products’ and ‘meat and fish’ exhibited lower inflation in May’21 compared to the preceding month. Items such as ‘vegetables’ and ‘sugar and confectionery’ remained in the deflationary zone, albeit much lower in May’21 compared with Apr’21. Inflation in ‘fuel and light’ rose to an over nine-year high of 11.6% YoY in May’21.

* Core inflation came in at a 82-month high of 6.3% YoY in May’21 as against 5.1% YoY in Apr’21. It rose above 6% for the first time in 31 months. While inflation in ‘miscellaneous’ items rose to a more than eight-year high of 7.5% YoY in May’21, the same in ‘clothing and footwear’ hit a 35-month high of 5.3% YoY.

* Separately, Wholesale Price Index (WPI) inflation rose to 12.9% YoY in May’21 from 10.5% in Apr’21 and -3.4% in May’20 – higher than our expectation of 12% YoY and lower than Bloomberg consensus of 13.4% YoY. The rise in WPI inflation in May’21 is attributable to higher inflation in manufactured products and fuel and power.

* WPI food inflation (both primary and manufactured products) rose to a 16-month high of 8.1% YoY in May’21 from 7.6% in Apr’21, led by higher inflation in manufactured food products. In fact, WPI core inflation (WPI for non-food manufactured products) rose to 10% YoY in May’21 from 8.4% in Apr’21.

* Overall, CPI inflation data for May’21 has come as a shock and the broad-based rise in inflation is concerning. Although it is unlikely to lead to any monetary tightening, inflation above 6% certainly rules out any further monetary easing.

I. Retail inflation at a half-year high

* CPI inflation way above expectations…: Headline inflation came in at 6.3% YoY in May’21 – above our expectations and Bloomberg consensus of 4.7%/5.4% YoY, respectively – v/s 4.2% YoY in Apr’21 (Exhibit 1).

* …due to higher inflation across the board: Food inflation came in at a six-month high of 5% YoY last month v/s 2% YoY in Apr’21 and 9.2% YoY in Apr’20 (Exhibit 2). Within food, only ‘cereals and products’ and ‘meat and fish’ exhibited lower inflation in May’21 compared to the preceding month. Items such as ‘vegetables’ and ‘sugar and confectionery’ remained in the deflationary zone, albeit much lower in May’21 compared with Apr’21 (Exhibit 3). While inflation in ‘pan, tobacco, and intoxicants’ rose to a three-month high of 10% YoY, the same in ‘fuel and light’ hit an over nine-year high of 11.6% YoY in May’21.

* Core inflation too shot up last month: Core inflation rose above 6% for the first time in 31 months. It came in at 6.3% YoY in May’21 as against 5.1% YoY in Apr’21 and 4.9% YoY in May’20 (Exhibit 4). It rose above 6% for the first time in 31 months. Within core, while inflation in ‘miscellaneous’ items rose to a more than eight-year high of 7.5% YoY in May’21, the same in ‘clothing and footwear’ hit a 35-month high of 5.3% YoY. Inflation in ‘housing’ inched up marginally to 3.9% YoY in May’21 from 3.7% YoY in Apr’21. Data rules out any further monetary easing: CPI inflation data for May’21 has come as a shock and the broad-based rise in inflation is concerning. Although it is unlikely to lead to any monetary tightening, inflation above 6% certainly rules out any further monetary easing.

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