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Favourable base in food drives inflation lower…

CPI Inflation

Key readings

* CPI Inflation for September declined sharply to 4.3% compared to 5.3% in August 2021. Inflation print has now declined 200 bps in the last three months from 6.3% in June 2021 to latest print at 4.3%

* The decline in headline inflation in the last two months is largely driven by a fall in food inflation. Consumer Food Price Index has come down sharply in the last three months from 5.1% in June 2021, 4.0% in July, 3.1% in August and now 0.7% in September 2021

* The favourable base effect in most food items was the major factor driving food inflation lower. The sequential decline in prices of vegetable, fruits and eggs also helped lower food inflation. Overall deflation in vegetables remains the single major item contributing to lower food inflation. Oil & fats and sugar and confectionery saw a sequential rise in prices with oil and fats remaining the major contributor of higher inflation.

* Core inflation was at levels similar to last month at 5.8%. Recreation and amusement (sharp MoM rise) and personal care and effects (unfavourable base) saw higher inflation. All other items are either lower or largely flat. Surprisingly, there was just a marginal rise on a month on month basis in inflation in fuel & light and transport & communication. Higher retail petrol and LPG prices were believed to have a higher inflationary impact

* Inflation has receded well below the RBI's upper target range of 6% and also printed below market expectations. The same will help in RBI continuing its growth focused approach and reduce market expectation of fast normalising liquidity stance.

Looking deeper…

* Indirect effect of higher crude oil and other commodity prices needs to be closely watched: Overall three items viz. oil & fats, transport & communication and fuel & light continue to be major contributor. These three items contribute more than 50% of the overall inflation. Effectively, edibles oils and global crude oil prices is a major driver of inflation. The indirect impact of these items is now visible in prices of many food and non-food prices and needs to be keenly watched

* Positive base effect till November: The base effect is positive till November driven by food inflation (average CFPI till November is 9.7% from June-November 2020)

* Better monsoon, lower risk of further lockdown is comforting: Overall core Inflation is the major driver of inflation in the last few months as food inflation fell significantly in the last three months from 5.3% to 0.7%. The expectation of near normal monsoon and no major local lockdown restriction should ease supply side pressure on many food as well as non-food items, going forward.

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