IGI Logo

Reflecting the impending input price pressures

* May headline CPI inflation unexpectedly rose 210bps to 6.3% on unfavorable base effect, compounded by across-the-board rise in sequential momentum in both headline and core inflation. Within food, both perishables (seasonal effect) and non-perishables led gains, while energy inflation depicted pass-through of global oil prices. Core inflation rose 130bps to 6.4% and increased sequentially across all sub-categories, led by personal care & effects and health.

* We raise FY22 inflation forecast to 5.45% from 4.7% (6.2% in FY21). Even assuming food inflation averaging around reasonable levels, core inflation should average above 6%, outdoing headline inflation. We remain watchful of pass-through of impending cost push pressures in core goods inflation, while re-opening-led ensuing demand revival in select contact-sensitive household services could pressure core services inflation ahead.

* However, the MPC may still choose to look through the spike in inflation in the near term, with the monetary reaction function currently hinging more on growth revival becoming sustainable.

CPI inflation breaches RBI’s tolerance band with a broad-based increase

Inflation unexpectedly surged 6.3% in May (Emkay: 5.35%, Consensus: 5.4%) after having eased to 4.29% in April nearing RBI’s mid-point target. While the low-base effect impacted negatively due to last year’s lockdown, the broad-based sequential increase seen in food, energy and core components played havoc as well. Within food, most food items/perishables saw a sharp seasonal uptick (which surprised on the downside in April).

While vegetables (2.6%m/m), fruits (1.8%), meat and fish (1.2%) led the pack, nonperishable items like cooking oil (5.0%), cereals (1.4%) and pulses (2.3%) also showed a meaningful sequential jump. Despite this seasonal uptick, food inflation may get back to reasonable levels in the coming months, amid good monsoons, low levels of MSP price hikes and government’s tax tweaks on edible oils. Energy inflation expectedly crossed double-digits (11.6%yoy) amid transmission of higher international prices to retail level amid the end of regional elections. The inflation pressure may remain high ahead with upcoming prints looking to be above the May print.

Core inflation increases 130bps to 6.4% with momentum shooting up

Core inflation (ex-food, fuel and intoxicants) also spiked to 6.4% (5.1% prior) and was again accompanied by sharp sequential gains of 1.5% (0.6%m/m in April), led by personal care and effects (up further 2.6% m/m, partly reflecting gold price increases), health (2.0%m/m), etc., while other core sub-components like household goods and services and transport costs also up-trended sharply (2.1% and 1.6%m/m each). Even relatively stable components like clothing rose sharply, reflecting higher input prices seen in cotton and textiles. We expect core inflation to remain high and average comfortably above 6% in FY22.

WPI inflation surges 12.9% in May; Core WPI above 10%

The 12.9% surge in May WPI inflation (Emkay:13.4%, Consensus:13.3%) was largely led by sharp sequential increases in energy (1.7%) and core manufacturing (1.1%) even as primary food contracted mildly. Core WPI inflation is 10.3%yoy (8.6% earlier), with most manufacturing products registering price gains, led by the continued acceleration in base metal prices. The strong sequential momentum could keep WPI elevated ahead, and pressure pass-through to core goods CPI inflation with a lag.

FY22 CPI to average 5.45%; accommodation abound even with inflation risks ahead

Today’s CPI inflation partly depicted the pass-through of impending input price pressures. Core goods inflation may remain elevated ahead with relentless increase in global commodity prices. Meanwhile, the ensuing demand revival in contact-sensitive household services amid reopening could pressure core services inflation ahead. Overall, core inflation will likely remain sticky ahead and will likely outdo headline through the year. We now see Headline CPI to average 5.45% (up from 4.7% earlier) and almost 50bps higher than the RBI’s forecast of 5.1%.

However, the MPC may still choose to look through the spike in inflation in the near term, with the monetary reaction function currently hinging more on growth revival becoming sustainable. Empirically, the pass-through from a 1% change in WPI non-food manufactured products inflation to CPI core goods inflation (~22%wt in CPI basket) is likely to be about 0.20%, but the pass-through is much less for overall CPI core inflation and even lesser to headline CPI inflation. However, this pass-through is time-varying and depends on the output gap.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

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