Economy

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

INFLATIONARY PRICE SPIRAL: WPI at record high of 12.9%

Wholesale inflation has inched up to a record high of 12.9% in May 2021 from 10.5% in April 2021 and 3.4% deflation in May 2020. CARE Ratings had estimated WPI at 11.1% during the month. The uptick in inflation during the month can be ascribed to the sharp increase in fuel and power prices, which have risen to the highest level in the 2011-12 base period series. Moreover, elevated prices in the manufacturing segment are indicative of the strengthening purchasing power of manufacturers. Prices in the food segment have softened marginally during the month.

FOOD DEFLATION? Primary articles (weightage of 22.62% in the WPI basket) has eased to 9.6% in May 2021 from double-digit inflation of 10.2% in April 2021. Inflation in this component stood at -2.1% in the corresponding month last year. ? Wholesale inflation in the food basket decreased marginally to 4.3% during the month, lower than 4.9% in the previous month and 1.7% in May 2020. - Inflation in cereals has witnessed persistent negative growth for the 10th successive month. However, there has been a sequential improvement from - 3.3% in April 2021 to -2.5% in May 2021. Deflation in cereals is likely to continue on the back of robust production of food grains - Prices of pulses have registered an uptick to 12.1% in May 2020 from 10.7% in the previous month on the back of supply side distortions. - There have been persistent deflationary pressures recorded in case of vegetable prices over the past six months. This component has recorded a deflation of 9% during the month. - Inflation in potatoes has registered a yoy decline of 27.9% in May 2021 on the back of abundant production - Inflation in onion prices has been at 23.2% in May 2021 compared with -19.7% in April 2021. This rise can be ascribed to elevated demand outstripping supply owing to logistic disruptions.

NON-FOOD ‘CULPRIT’In May 2021, inflation in non-food articles scaled up to an eightyear high of 18.4% over 15.6% in April 2021 and -3.9% in May 2020. The fuel and power segment (weightage of 13.15% in the WPI basket) continued to witness sustained inflation for the 4th successive month. Inflation in this component jumped to 37.6% in May 2021 compared with 20.9% in the previous month and de-growth of 23.1% in the corresponding month last year. Fuel prices are likely to be upward bound on the back of elevated global crude oil prices amidst a rebound in domestic economic activities as the second wave of the coronavirus subsides. ? In May 2021, inflation in manufactured products scaled a record high of 10.8% (highest in the 2011-12 base period series), higher than 9.0% in April 2021 and deflation of 0.3% in May 2020. Higher factory gate prices in the manufacturing segment are representative of firmness in the pricing power of corporates.

BASIC METALS SPIRALBarring tobacco products, all other industries have recorded an increase in prices. Doubledigit inflation has been witnessed in manufacture of food products (15.2%), textiles (11.4%), paper & paper products (10.7%), chemicals & chemical products (10.7%), rubber & plastics products (13%), basic metals (27.6%) and fabricated metal products except machinery & equipment (10.6%). - Basic metals comprising the highest weightage of 9.65% in the WPI index has recorded double-digit inflation of 27.6% during the month, higher than 19.3% in April 2021. The increasing prices of mild steel-semi finished steel (24% inflation in May 2021) have been driving up the prices of basic metals. - Inflation in food products (weight of 9.12% in the WPI basket) has edged upwards to 15.2% during the month from 12.6% in the previous month on account of persistent inflation in vegetable and animal oils & fats.

CPI at six-month high

Retail inflation mirrors WPI

As against CARE Ratings expectations (4.9%) on retail inflation, the headline number registered a notable spike of 6.3% (yoy) during May 2021 but was at the same level as in the corresponding month of last year. Retail inflation in May 2021 rose to a 6-month high and is now above the upper band of the RBI's flexible inflation target range of 2%-6% for the first time after 5 consecutive months of remaining within that band. After remaining within that target range from December 2020 to April 2021, the recent uptick in the headline number could pose a challenge to the RBI's monetary policy dynamics.

The surge in the headline number has been broadbased as each component of the CPI basket has witnessed an uptick in the yoy growth number compared with the April 2021 growth numbers.

Prominent factors which have driven the increase have been food inflation (rose to a 6-month high), the miscellaneous component (rose to a little more than an 8-year high) and the fuel component (a little more than a 9-year high). Importantly, core inflation which has remained sticky throughout FY21 has now inched up to its highest level in the past 7 years. Both wholesale inflation (released recently) and retail inflation have seen a CPI at six-month high Retail inflation mirrors WPI The fuel and power segment (weightage of 13.15% in the WPI basket) continued to witness sustained inflation for the 4th successive month. Inflation in this component jumped to 37.6% in May 2021 compared with 20.9% in the previous month and de-growth of 23.1% in the corresponding month last year. Fuel prices are likely to be upward bound on the back of elevated global crude oil prices amidst a rebound in domestic economic activities as the second wave of the coronavirus subsides. ? In May 2021, inflation in manufactured products scaled a record high of 10.8% (highest in the 2011-12 base period series), higher than 9.0% in April 2021 and deflation of 0.3% in May 2020. Higher factory gate prices in the manufacturing segment are representative of firmness in the pricing power of corporates. BASIC METALS SPIRALBarring tobacco products, all other industries have recorded an increase in prices. Doubledigit inflation has been witnessed in manufacture of food products (15.2%), textiles (11.4%), paper & paper products (10.7%), chemicals & chemical products (10.7%), rubber & plastics products (13%), basic metals (27.6%) and fabricated metal products except machinery & equipment (10.6%). - Basic metals comprising the highest weightage of 9.65% in the WPI index has recorded double-digit inflation of 27.6% during the month, higher than 19.3% in April 2021. The increasing prices of mild steel-semi finished steel (24% inflation in May 2021) have been driving up the prices of basic metals. - Inflation in food products (weight of 9.12% in the WPI basket) has edged upwards to 15.2% during the month from 12.6% in the previous month on account of persistent inflation in vegetable and animal oils & fats. similar movement in May 2021 and the supply disruptions owing to localised lockdowns could also have had a bearing on the inflation numbers.

PROTEIN 'DRIVER'

Inflation in food & beverages rose to a 6-month high of 5.2% in May 2021 compared with 8.3% in May 2020.

The increase in food inflation has been chiefly on account of sustained inflationary pressures in the protein segment (meat, eggs, pulses) and double-digit growth in both edible oils and non-alcoholic beverages.

Prices of vegetables have remained soft as this segment has recorded a 6th consecutive month of deflation in May 2021. The degrowth can be ascribed to seasonal arrivals leading to a dip in the prices of vegetables.

Edible oil inflation has been the highest on record. Edible oil inflation rose to 30.8% in May 2021, primarily on account of a sustained increase in international prices, with a sizeable dependence on imports to meet domestic demand coupled with lower imports from foreign countries.

Inflation in pulses was 9.3% in May 2021 compared with double digit growth of 21% in the corresponding month of last year. This can be ascribed to supply side disruptions owing to the localised lockdowns in various states coupled with increased demand for protein items.

Meat prices increased by 9% (yoy) while egg prices rose by 15% due to increased consumption, supply constraints and a rise in global feed prices.

DEARER HOUSING

Housing inflation increased to a 13-month high of 3.86% in April.

Inflation in fuel components increased to a nearly 9- year high at 11.6% in May 2021 compared with 1.6% growth in May 2020. The rise in global energy prices coupled with the high domestic taxes has been pushing fuel prices upwards. The higher fuel prices have also led to an increase in transportation costs that feeds into prices across segments.

COSTLY 'OTHERS'

Inflation in the miscellaneous component was at a near 8-year high of 7.5% in May 2021 compared with 5.8% in May 2020.

The uptick in the miscellaneous component has been chiefly on account of transportation (12.4%), health (8.4%) and personal care (8%). The spike in retail petroleum prices has driven the double-digit inflation in the transportation segment. The pick-up in gold prices contributed to the increase in the personal care segment.

Health inflation rose to a near 2-year high of 8.44% in May 2021 while inflation in the education segment at 1.38% is benign.

CORE INFLATION UP

Core inflation rose to its highest level in the last 7 years to 6.6% in May 2021, primarily on account of a sharp increase in the miscellaneous segment driven by retail fuel prices. Core inflation had remained sticky throughout FY21 in the 5-6% range but the perceptible growth in May 2021 could add to the worries of the RBI's Monetary Policy Committee.

INDICES SEESAW

The divergence between wholesale and retail inflation continues in May 2021 with the gap between the two widening as the pace of wholesale inflation has been notably higher than retail inflation. This shows that the rally in international commodity prices is getting reflected in the prices of the wholesale basket while the uptick in the retail headline number is more gradual. There has been a complete reversal in the wholesale and retail divergence compared with the same month of the previous year. Wholesale inflation in May 2020 was negative and retail inflation was elevated, while in May 2021 wholesale inflation has zoomed up to double digits and the retail number has spiked just marginally above the upper band of the RBI's inflation target.

COSTLY DAYS REMAIN

Headline inflation in the coming months is likely be elevated despite a high base effect and the relaxation of lockdown restrictions by most states, which could ease supply concerns. The seasonal factor would be pushing up prices of vegetables and could lead to higher inflation. Higher prices for pulses and edible oil are likely to sustain for the next couple of months. Global commodity prices have been firmed up recently and this could percolate from the wholesale basket to the retail basket. Additionally, transportation and logistics costs will remain elevated due to a pick-up in international crude oil prices and are unlikely to abate in the next couple of months, which could keep inflation in this segment high. One needs to wait and watch whether the recent uptick is transitory and whether the headline number could moderate to below the upper band of the RBI's inflation target.

Though the double digit wholesale inflation number does not have a bearing on the MPC's policy action, this unexpected spike in retail inflation adds to the uncertainty in the forthcoming monetary policy announcement. Though the RBI has been firm on giving higher weightage to growth over inflation, one may have to wait for the June 2021 retail inflation number to assess the RBI's next policy move. CARE Ratings expects retail inflation to range between 5-5.5% with an upside bias in FY22.