IGI Logo

Cheaper food takes CPI to 5-month low of 4.3%; IIP grows 12% in Aug ’21 on low base

* Retail inflation falls to 5-month low of 4.3%: India’s retail inflation fell to 5-month low of 4.3%y/y in Sep ’21, sharply down from 5.3% in Aug and 7.3% in Sep ’20. With this, average inflation in Q2FY22 stands at 5.1% and in H1FY22 stands at 5.3%. In the recently-released monetary policy review, the MPC had projected inflation in Q2FY22 at 5.1%, implying an inflation print of 4.4% in Sep ’21. The actual number is in line with MPC, street and our own estimate.

* In sequential terms, base effect shaves off 110bps while monthly momentum adds 18bps: During Sep and Aug 2021, inflation eased by ~95bps. Bifurcating the decline into base effect and month-on-month momentum shows that most of the decline was driven by base effect.

The base effect for Sep ’21 was -110bps (inflation between Sep ’20 and Aug ’20 increased by 60bps) while month-on-month momentum added ~18bps to headline inflation, resulting in a sequential decline of almost one percentage point. This also shows that the sharp sequential decline is largely driven by statistical effect and does not reflect genuine price decline. The base effect is for Oct ’21 is -130bps hence we expect it to keep a lid on inflation.

* Food and beverages inflation falls to 29-month low of 1.6%: Food and beverages inflation fell to a 29-month low of 1.6% in Sep ’21, down from 3.7% in Aug and 9.8% in Sep ’20. As a result, in Sep ’21, food and beverages contributed only 70bps (or 17% of total inflation) to CPI compared to 450bps (or 61% of total inflation) a year ago. Similarly, pan & tobacco and miscellaneous inflation also fell during Sep ’21 and Sep ’20, collectively shaving off 40bps during the said period.

On the other hand, clothing & footwear and housing inflation increased moderately during the said period, adding 40bps to headline inflation. The biggest increase, however, was recorded by fuel & light group – inflation in this group increased to 13.6% in Sep ’21 from just 2.8% in Sep ’20. As a result, fuel & light group alone added 70bps to headline inflation during Sep ’21 and Sep ’20.

* Within food & beverages, vegetables and cereals drive the decline in inflation: An analysis of the components of food & beverages inflation shows that most of the decline in inflation was driven by two items viz. vegetables and cereals. Vegetables inflation in Sep ’21 came in at -22.5% (albeit on a high base of 21% inflation in Sep ’20) while cereals inflation came in at -0.6% (vs 4.7% in Sep ’20).

Since these two items collectively account for over one-third of the food & beverages basket, significantly lower inflation in these two items drove F&B inflation lower. Other items such as meat, spices, milk, and pulses also recorded lower inflation in y/y terms. On the other hand, oilseeds inflation continued rising unabated. In Sep ’21, oilseeds inflation stood at 34%, up from 13.4% in Sep ’20. Sep ’21 also marks the 18th consecutive month of double-digit inflation in oilseeds and the 5th consecutive month of over 30% inflation in the food item.

* Services inflation eases marginally to 6.4%, core inflation at 5.8%: Services inflation eased marginally to 6.4% during Sep ’21 from 6.9% in Sep ’20, but little changed from its Aug ’21 level. In year-on-year terms, the softening of services inflation was mainly driven by household goods & services, transport and personal care costs although some categories such as healthcare, recreation and education costs recorded moderate increase in inflation.

Core inflation increased moderately to 5.8% in Sep ’21 from 5.7% a year ago but broadly unchanged from the preceding month. With this print, core inflation now averages 5.8% in Q2FY22 and 5.9% in H1FY22. Despite the recent softening of headline inflation, persistently high core inflation is a cause of concern.

* IIP grows 12% on low base: IIP growth came in at 11.9% in Aug ’21 on a low base of - 7.1% growth twelve months ago. In the preceding month, IIP growth stood at 11.5%. A segregation of IIP growth into base effect and monthly momentum shows that out of the 40bps growth recorded during Aug ’21 and Jul ’21, base effect contributed 60bps while month-on-month momentum shaved off 20bps. In Aug ’21, mining, manufacturing and electricity contributed 23.6%, 9.7% and 16% respectively.

Within manufacturing, petroleum and machinery manufacturing recorded strong performance. From the usebased perspective, the growth was mainly driven by primary goods followed by intermediate goods, capital goods and infra-construction goods. We expect IIP performance to remain good in the short period due to the festive season.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

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