Inflation in Feb 6.44% on prices of cereals, milk

A hike will add to the cumulative rate hike of 2.5 percentage points since May 2022 and is bound to generate growth headwinds for what is already a slowing economy.

India’s benchmark inflation number, as measured by the Consumer Price Index (CPI) grew at 6.44% in February on the back of sticky core inflation, and higher cereal and milk prices, raising chances of another interest rate hike in April.

At 6.44%, inflation was above the upper limit of the Reserve Bank of India’s tolerance band of 2%-6% for the second consecutive month, causing many analysts to conclude that an interest rate hike in the April meeting of the central bank’s Monetary Policy Committee (MPC) is almost a given now. A hike will add to the cumulative rate hike of 2.5 percentage points since May 2022 and is bound to generate growth headwinds for what is already a slowing economy.

The headline inflation number is the result of a sticky core inflation – it tracks the non-food non-fuel part of the CPI basket – and surging prices of cereals and milk products. The troubling inflation numbers have come at a time when farmers in many parts of the country are protesting against a crash in prices of crops such as onions, potatoes and tomatoes. Latest CPI data confirms the crisis with vegetable prices falling by 11.6% on an annual basis in February.

The latest CPI print is in line with a Bloomberg poll of economists which had predicted a value of 6.4%. Barring the months of November and December 2022, headline CPI has stayed above the 6% mark for all months since January 2022.

Given the fact that CPI value for January was 6.5%, it is extremely unlikely that the MPC’s February projection of 5.7% inflation in the quarter ending March 2023 will materialize. March quarter inflation likely exceeding MPC’s projection comes on the back of the MPC overestimating inflation (6.6% projected versus 6.1% actual) in its forecast for the quarter ending December 2022.

The surge in headline inflation number is the result of a sticky core inflation and rising food prices despite a weakness in prices of vegetables and edible oils. Core CPI inflation has been 6.2% for four consecutive months beginning November 2022 and it has been hovering over the 6% mark for more than a year. This suggests that inflation is a broad-based problem in the economy and not the result of some seasonal shock to prices of a few commodities. The fact that inflation in the miscellaneous category (it tracks the price of consumer services) stood at 6.1% underlines this point.

Food inflation, which has a share of 39% in the CPI basket, was virtually unchanged with readings of 6% and 5.95% in January and February. To be sure, the food economy is witnessing radically different trajectory of prices for different commodities. While the prices of cereals and milk products continue to rise at a fast pace — at 16.7% and 9.7% respectively — items such as vegetables and edible oil are experiencing a fall in prices. Vegetable prices contracted by 11.6% in February while prices in the oils and fats categories fell by 0.5% on an annual basis. Wheat inflation came in at 25.4% in February 2023, making it the ninth consecutive month of double digit (and increasing) inflation for the critical cereal. A widely anticipated heatwave in northwestern states has not struck so far, helping to keep the country’s crucial wheat crop in good shape, according to a latest government review.

“The overshoot of inflation, combined with a hawkish set of minutes from the last MPC meeting, suggests that the balance of risks is tilted towards another hike at the April meeting. We expect a 25bp hike in April, albeit with continued dissent among the MPC members. For March, we track headline CPI around 5.5% y/y for now, although the risks to the print remain skewed to the upside, in our view,” Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, said.