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CPI Inflation - Brace for a front-loaded hike in June

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Madhavi Arora

Lead – Economist

12 May 2022

 The April inflation shock of 7.8% is attributable to broad-based gains in food, energy and the coresegment. As expected, the uptrend has been driven by higher prices for motor fuel and cooking fuel, energy and some food products. Some segments of the food basket also witnessed further increases, led by cooking oil and fruits. Outside of food and fuel, core inflation surged to 7.35%, continuing the trend observed in the past few months. Personal care and goods continued their rise, led by gold and price hikes in FMCG. We are tracking May inflation at 6.8%.

 The consistent pressure on input costs amid higher global commodities has pushed core inflationwell above 7.0%. Overall, rising price pressures remain a policy concern and are likely to push the MPC further. The triple whammy of commodity-price shocks, supply-chain shocks and near-resilient growth has shifted the reaction function in favor of inflation containment.

 The RBI no longer thinks the output sacrifice required to tame somewhat supply-driven inflation canbe so high on net. The central bank’s reaction function is now evolving with fluid macro realities. We see June’s policy to be live, and the MPC may front-load rates by another 25-50bps. FY23 could thus see rates going up by 100-125bps more, with the RBI now showing its intent to keep real rates neutral or above.

 

CPI inflation shocks at 7.8%, food inflation hurt by costlier supply chain

CPI inflation surged to 7.8% in Apr’22, surpassing expectations (Emkay: 7.45%, Consensus: 7.4%), with this being the fourth-straight month above the RBI upper tolerance limit and also the highest print since June 2014. The increase was broad-based, led by food, energy and core. Food inflation (8.4% yoy; 1.6% mom) led the April spike, marking the highest print in 17 months, driven by fruits, edible oils, cereals, etc. While fruits may see seasonal swings ahead, edible oils and cereals may stay high going ahead as well, owing to the Indonesia ban and heat waves, respectively. While pulses, sugar, and vegetables were sequentially lower, mandi prices show select pressure on vegetable prices in the coming month even as other perishables may remain high. The summer months should see a seasonal rise in food prices, while higher transportation costs may further add to the woes. Energy inflation at 10.8% (3.5% mom) seems to show significant pass-through of oil pain, while cooking gas and kerosene also increased sharply. Electricity tariff increases seen in April could see a leg up further, as states may implement the proposed hikes.Core inflation surges 80bps to 7.35% and is likely to shoot up furtherCore inflation (ex-food, fuel and intoxicants) jumped to a near 8-year high of 7.35% (6.59% prior, up 1.26% mom), reflecting the impact of higher pass-through of input costs and elevated transportation costs. The sharp uptick in T&C reflected the surge in motor fuel and kerosene prices in April and private transport services price increase in urban areas (Uber, etc., raising prices). The personal care & effects category contributed significantly as well again, while housing prices showed a seasonal pick-up. Healthcare costs also increased after a sharp hike in administered prices of generic medicines. Overall, core inflation momentum should remain strong, as firms may continue to partially pass on persisting higher input costs (as seen in recent PMIs and some commentary from FMCG companies and healthcare firms), implying that the average print will hover around 6.5% through Q1FY23.IIP grows 1.85% on a pick-up in manufacturingIIP grew 1.85% in Mar’22 (Emkay: 1.3%; Consensus: 1.3%; 1.5% prior), led by healthy year-end sequential gains. Manufacturing grew 0.9% (10.9% mom), driven by segments such as wearing apparel, electronics and food products. Mining and electricity grew by 4.0% yoy and 6.1% yoy, respectively. Per use-based, consumer durables (-3.2% yoy) and non-durables (-5.0% yoy) continued to contract, while growth was seen in infra (7.3%), primary goods (5.7%) and intermediate goods (0.6%), with a sequential decline across sectors. Going ahead, rising input costs could impede the recovery both through lower corporate profits and consumption.FY23 CPI to average near 6.6%+; June to see 25-50bps?CPI inflation, after having breached 6%, is on its way to average 6.4% in the coming two quarters, pressurizing the RBI to act and front-load. We are tracking May'22 inflation at 6.8%, and this may push the MPC to hike by another 25-50bps in June. With food pressures looking high in the near-term (summer effect, international prices, higher transport costs, supply chains) and persistent input cost pressures in the non-food segment, we now see inflation crossing 6.6% in FY23. The triple whammy of commodity-price shocks, supply-chain shocks and resilient growth has shifted the central bank’s reaction function in favor of inflation containment. The RBI no longer thinks the output sacrifice required to contain somewhat supply-driven inflation can be so high on net. The reaction function is now evolving with fluid macro realities. FY23 could thus see rates going up by 100-125bps more, with the RBI now showing its intent to keep real rates neutral or above.