India's retail inflation likely to move upward

India's November CPI (Consumer Price Index) at 4.9 per cent YoY was below consensus and our expectation, although it picked up from 4.5 per cent in October. While momentum in food prices was a bit lower than expected, it was the fuel and light basket which really surprised with a sequential contraction. However, core CPI (headline excluding food and beverages, fuel and light) at 6.1 per cent continued to be persistently high, particularly of concern in the context of recovering demand, and highlighted by the RBI Governor in his most recent monetary policy statement. Notwithstanding the slight 'dovish' surprise of the November print, reasons for which we investigate below, several factors tilt the CPI's balance towards a higher trajectory.

Noteworthy November

Sequential price growth for some food items like meat and fish, oils and fats fell while that of vegetables and pulses increased at a lower-than-expected rate. However, price momentum of the fuel and light category surprisingly fell. Average LPG (Liquefied Petroleum Gas) price across the four cities of Chennai, Delhi, Kolkata and Mumbai increased by 15.1 per cent m/m in November but the official CPI reading for 'LPG excluding conveyance' picked up only by 0.2 per cent. Although there is divergence every month between these, the 14.9ppt gap in November was the highest.

Despite the expected rise in electricity price due to widely-reported power issues, CPI for electricity price fell further by 3.2 per cent m/m after -0.2 per cent in October. Preliminary October WPI (Wholesale Price Index) reading for the electricity component spiked by 18.8 per cent m/m (highest ever in the current WPI electricity series) but this was revised today to 0 per cent. The reason for this large revision is not clear at the time of writing. Thus, the expected CPI-electricity increase did not materialise but the recent shift in direction of the WPI-CPI divergence here is noteworthy.

Further, momentum in CPI-petrol index typically tracks that in the real-time price data based on average across major cities and for the month. This gap also widened in November.

To understand the nature of divergence between WPI and CPI among the fuel items common to both indices, we construct a composite-fuel-index for WPI and CPI using only electricity, petrol, diesel, coal and LPG. The direction of divergence for the composite index has reversed from Jun21 and has also increased in the last few months.

Interestingly, we notice that the fuel and light price index aggregated using its component data and weights (available from 2014) differs from the official index and the magnitude of this has increased more recently. The resulting difference in per cent YoY numbers (between aggregated and reported numbers) was the highest at +1.4ppt in November, up from +0.7ppt in October and the previous high of +0.9ppt in September.

Thus, although the November CPI was below expectation, there seems to be higher divergence more recently when compared to real-time data and WPI. This was particularly visible in the fuel and light category, which also reported a lower than-usual official index vs. when aggregated from components. Core inflation has remained high and sticky but this is now more broad-based and is clearly visible even in alternative measures. Various factors could push the future CPI trajectory upward although the exact timing and magnitude of the impact of some of these are not entirely clear. The spread of Covid-19 infections and the Omicron variant could have its impact, but on both growth and inflation. For now, the wind is gathering.