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Inflation indices show divergent trend in Aug; IIP growth for Jul at 11.5%

* Retail inflation eases to 4-month low of 5.3% in Aug ’21: India’s retail inflation eased to 4-month low of 5.3% y/y in Aug ’21, down from 5.6% in the preceding month and 6.7% in Aug 2020. With this print, retail inflation in the first two months of Q2FY22 stands at 5.4%, lower than MPC’s forecast of 5.9% and Professional Forecasters’ Survey estimate of 5.7%. Average inflation in the first five months of FY22 now stands at 5.5%.

* Base effect shaves off 50bps in Aug ’21, likely to keep a lid on inflation in Sep-Oct: In line with past trend, base effect kept a lid on headline inflation. Of the 30bps sequential decline in headline inflation during Aug ’21 and Jul ’21, base effect shaved off 50bps and sequential momentum added 20bps. Interestingly, Aug ’21 marks the lowest sequential increase since Mar ’21: in Apr, May, Jun, and Jul 2021 sequential price momentum was 60bps, 160bps, 60bps and 70bps respectively. Base effect is likely to keep inflation low in Sep-Oct 2021 as well, subtracting 110bps and 130bps respectively in the next two months.

* Food inflation falls to 4-month low of 3.8%, oilseeds inflation continues rising...: Food inflation also fell to 4-month low of 3.8% y/y in Aug 2021, down from 4.5% in the preceding month and 8.3% in Aug 2020. While prices of almost all food items declined during the last twelve months, the main drivers of lower food inflation were cereals and vegetables. Cereals inflation fell to -1.4% in Aug 2021 from 5.9% in Aug 2020 while vegetables inflation fell to -11.7% from 11.5% during the said period. Prices of other food items such as meat and fish, milk, pulses, sugar and spices also declined substantially during Aug 2021 and Aug 2020. However, items like eggs, oilseeds, fruits, non-alcoholic beverages and prepared meals increased during the said period.Oilseed prices continued increasing due to rising international prices of the food item. Our analysis shows that oilseeds alone contributed 160bps to food inflation during Aug 2021 and Aug 2020.

* …while fuel inflation increases to series-high of 12.9%: Out of the major components of CPI basket, lower food inflation shaved off ~200bps from headline inflation. The collective net contribution of pan & tobacco, clothing & footwear, housing and services was zero. However, fuel & light inflation continued rising, leading to net addition of 70bps. In Aug 2021, fuel and light inflation came in at 12.9%, the highest reading for the category in new series. Since May ‘21, fuel and light inflation has been printing over 10%, averaging 12.4% during May and Aug.

* Services inflation falls to 6.4% driven by lower personal care costs: Services inflation fell to 6.4% in Aug 2021 mainly driven by lower personal care costs. Some subcomponents of services inflation such as household goods and services, healthcare, recreation and education costs increased during Aug 2021 and Aug 2020, sharp decline in personal care costs from 14.5% in Aug 2020 to just 1% in Aug 2021 led to softening of overall services inflation. Services inflation in Jul 2021 stood at 6.7% while in Aug 2020 it was 7%.

* Core inflation broadly unchanged at 5.8%: Core inflation remained broadly unchanged at 5.8% during Aug 2021 and Aug 2020, although it moderated a bit from 6% in Jul 2021. In the first five months of FY22, core inflation has averaged 6%. In the near future too, while headline inflation is expected to ease core inflation is expected to remain elevated which is a cause of concern. An analysis of the internals of core inflation shows that while items such as clothing & footwear, healthcare, and education costs increased during Aug 2021 and Aug 2020, a large decline in personal care costs led to unchanged core inflation during the said period.

* WPI inflation prints 11.4% in Aug ’21: Unlike retail inflation, WPI inflation increased in both y/y and sequential terms in Aug ’21. WPI for Aug ’21 came in at 11.4% up from 11.2% in Jul ’21 and 0.4% in Aug ’20. In Aug ’21, base effect shaved off 80bps from inflation while sequential momentum added 100bps thereby indicating strong month-on-month momentum of price increases. Manufactured products inflation came in at 11.4% while fuel inflation remained high at 26%. Within manufacturing, base metals inflation came off highs to print 27% after remaining at ~29% during May-Jul. However, other components of manufacturing basket which were pushing inflation in the recent past viz. textiles and chemicals continued to register higher inflation in Aug ’21.

* IIP grows 11.5% in Jul ’21 on low base: IIP grew 11.5% y/y in Jul 2021 on low base. In Jul 2020, IIP had contracted 10.5%. All subcomponents i.e. mining (19.5%), manufacturing (10.5%) and electricity (11.1%) posted strong growth during Jul 2021 driven by low base. From the use-based perspective, capital goods (29%) posted strongest growth followed by consumer durables (20%), and intermediate goods (14%).

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