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Food moves higher, pass through of higher input prices an overhang…

CPI inflation (February 2022)

Key readings

CPI inflation for February rose marginally to 6.07% compared to 6.01% in January 2022. Higher inflation was largely due to higher food inflation

Food inflation (CFPI) rose to 5.85% in February 2022 against 5.43% in January 2022. Within food inflation, unfavourable base effect in vegetables, unfavourable base in vegetables, no sequential decline in oil & fats and MoM rise in meat & fish and spices led to higher inflation

Within food inflation, items which witness higher inflation were meat & fish at 7.4% (5.5% in January), eggs at 4.1% (2.2% in January), vegetables at 6.1% (5.1% in January), cereals at 4% (3.5% in January) and spices at 6.1% (4.7% in January). On MoM basis, vegetable prices saw lower decline of -2.6% compared to -7.4% in January. Oil and fats while declining marginally to 16.4% YoY (vs. 18.7% YoY last month), remained elevated and the sequential decline witnessed in the last three months was arrested in February. Other items that saw a deceleration in rate of price rise were milk at 3.8% (4% in January), non-alcoholic beverages at 5.8% (6.7% in January) and prepared meals at 6.3% (6.4% in January)

Many items like milk, tea and other FMCG products have seen prices rises from March 2022. It is likely to prevent food inflation from coming down to a certain extent

Core inflation largely stayed at levels similar to the last few months at ~6.0%. While international oil prices have risen significantly in the last one month, transport and communication index only increased by 0.3% MoM or 8.1% YoY (vs. 9.3% YoY last month). Personal care and effects inflation rose to 5.4% in February vs. 3.5% in January due to rise in gold prices. Other items that have seen higher inflation was footwear. Many core items may witness higher inflation, going forward, as companies pass on higher input prices

Headline CPI projection by RBI for Q4FY22 is at 5.7% while January and February are close to 6.0%. Hence, RBI is already undershooting its inflation forecast with similar concerns now getting heightened for next year’s RBI inflation projections. For FY23, RBI expects inflation at 4.5% while market expectation is around 5.5%

Risk of pass-through higher input cost by companies an overhang: International prices of food, oil and metal are trading at significantly elevated levels with pass through to retail consumers currently ongoing and the impact would be visible, going forward, as well. From a debt market perspective, while markets have already factored in a tightening environment, it is better to remain cautious and wait for a few quarters for long term debt allocation

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