Retail Inflation

Published: Dec 29, 2021
Updated: Dec 29, 2021

Highest increase since FY16

India’s headline inflation as measured by the consumer price index (CPI) rose to a fourmonth high of 5.5% in March 2021, largely owing to the rise in fuel prices and higher prices of food items. The inflation reading is in line with CARE Ratings’ projections. Retail inflation in the last two months (Feb-March) has been over 5%, reversing the moderation to below 5% witnessed in December and January. The increase in the CPI has raised concerns over emerging price pressure given that the growth (yoy) in inflation has been over a relative high base (CPI of 6.6% in February 2020 and 5.8% in March 2020).

There has been a broad-based increase in price levels across the key segments of the CPI. Core inflation remained elevated at a two and a half- year highs. Also, the increase in price levels has been sharper in the urban areas than in rural areas. Despite the rise in price levels, retail inflation at the aggregate level was nearly 1.4% lower than in November 2020 (6.9%).

Retail inflation in FY21 averaged 6.4%, compared with 4.8% in FY20, and was the highest annual increase since FY16. During FY21, retail inflation was above the RBI’s upper tolerance limit of 6% for eight consecutive months (Apr-Nov 2020), with a peak rate of 7.6% in October 2020. For much of the year, the high levels of inflation were primarily due to high prices in the food segment consequent to the supply chain disruptions caused by the pandemic-led lockdowns.

Inflation in food & beverages rose to a four-month high of 5.2% in March 2021 (over the growth of 7.8% in March 2020). It was 1% higher than that in February 2021 (4.25%). — Within the food basket, prices have been high in the case of meat & fish, eggs, fruits, edible oils and pulses. The increase in food inflation was partly offset by the fall in prices of vegetables.

— Constrained supply, increased demand and higher transportation costs have been pressuring prices of food items.

— Prices of vegetables eased with the arrival of the winter crop (yoy of -4.8% in March). In the case of onions, lower exports have added to the domestic supplies, weighing down its prices which had witnessed a spike in February on account of crop damage due to unseasonal rains.

— The disinflation in vegetable prices is primarily on account of the high statistical base effect (vegetable inflation of 19% increase in March 2020).

— Edible oil inflation has increased by a record 25% from a year ago (7.5% in March 2020). This is on account of increased domestic demand coupled with the higher cost of imports amid lower supplies in the major exporting nations.

— The price rise in pulses by 13% (over the 16% growth in March 2020) is driven by supply shortages in the producing regions within the country as well as the overseas markets due to adverse weather conditions (drought). Also, the political tensions in Myanmar, which is a key producer, have affected exports from that nation and pushed up global prices of pulses.

— Meat prices increased by 15% (y-o-y) due to increased consumption with easing worries of bird flu. Also, lower production levels given the uncertainty surrounding the pandemic have kept prices at higher levels.

HOUSING, FUEL

Housing inflation increased to 3.5% in March after being stable at 3.2% for four months.

Inflation in fuel components accelerated by 4.5% in March 2021 over the 6.5% growth in March 2020. The rise in global energy prices, coupled with the high domestic taxes, has been pushing fuel prices upwards.

Inflation in the miscellaneous component rose to 6.9% in March 2021 — the highest level in four months. The increase is mainly on account of a rise in price levels in the transport & communication, recreation & amusement, and health segments.

— Health Inflation rose by 6.2% in March 2021.

— Inflation in transport and communication was at a record high of 12.5%.

— Recreation and amusement inflation stood at 6%.

— Personal care and effects inflation at 5.9% in March was the lowest since October 2019.

Core CPI

Core inflation firmed up to a 32-month high in March. At 5.82% it was 2 bps higher than that in February 2021. The non-food and non-fuel component of the CPI have been sustained at elevated levels, and point towards rising input costs.

State-wise inflation

22 states which have reported inflation for March 2021 have been plotted in Exhibit 3 along with inflation in the corresponding month of last year.

Twelve states have recorded inflation more than the all-India retail inflation for the month (5.52%).

Amongst the states, Andhra Pradesh saw the highest retail inflation at 8.9%, followed by Tamil Nadu at 7.7%.

Inflation was amongst the lowest in the case of Rajasthan (3.0%) and Uttar Pradesh (3.2%).

Rural vs Urban inflation

The gap between rural and urban retail inflation has widened in the month of March 2021, with urban inflation at 6.5% compared with rural inflation at 4.6%. Urban inflation has been outpacing rural inflation since December 2020.

According to Care Ratings, with renewed pandemic restrictions across the country, elevated global prices across commodities and higher transportation and logistics cost, price pressures are likely to prevail in the coming months for most segments. At the same time, the headline inflation reading could benefit from the higher base of a year ago. We expect CPI inflation to rule above 5% for the next 2-3 months. However, given the stance of the RBI in its policy announced last week, this would not be a major concern for the markets as bond yields would be driven by the liquidity enhancing measures.