CPI Inflation At Eight-Year High In April: All You Need To Know

Retail inflation in India soared to the highest since May 2014, led by a rise in prices of food items and fuel. It rose 7.79% in April, compared with 6.95% in March.

Price pressures came from everywhere. At 8.1%, food and beverages inflation rose to the highest since November 2020. Fuel prices rose 10%. Core inflation, which excludes food and fuel, also rose to an eight-year high of 7.24%.

While headline inflation was a shocker in itself, economists say the internals are more worrying and suggest that inflation is becoming generalised.

Here are a few things to note about the current inflation surge facing India.

CPI inflation in April was the highest since India adopted an inflation targeting framework. This requires that the central bank maintain inflation in a band of 4 (+/-2)%.

When adopting this framework, policymakers hoped that inflation would become less volatile as the central bank would act early if inflation pressures started to pick up. However, the pandemic and the damage it did to growth forced the central bank to delay action.

It has now started hiking rates, beginning with a 40 basis point hike in the repo rate to 4.4% in May. It will have to do more. "We now expect RBI to raise rates both in June and August policy meeting by a cumulative 75 basis points," said Soumya Kanti Ghosh, chief economist at State Bank of India.

The current surge in inflation is hurting rural India more, where prices are rising more sharply. Combined with weak growth in rural incomes, this could add to increased pressure on rural demand.

In April, rural inflation rose to an eight-year high of 8.38%. Urban inflation, at 7.09%, is at its highest in 18-months.

Rural consumers are paying more across a number of categories:

• Rural inflation was higher for food and beverages at 8.35%, compared to 7.72% in urban areas.

• Clothing and footwear inflation was higher for rural areas at 10.76%, compared to urban areas at 8.34%.

• Fuel and light inflation was higher in rural areas at 8.35%, compared to 7.72% in urban areas.

Each of these categories have a higher share in rural consumption. "This could have implications on rural demand, which is yet to show a healthy pickup," said Rajani Sinha, chief economist at CareEdge.

While India computes a nationwide inflation rate, the pace of price rises often differ from state to state. The same is true this time too.

Among major states, inflation in West Bengal was the highest at 9.12%, followed by Madhya Pradesh, Telangana, Haryana, and Maharashtra.

Kerala saw the lowest inflation across major states at 5.08%. This was followed by Tamil Nadu, Karnataka and Delhi.

If you are wondering where prices are rising the most, fuel products are certainly at the top of the list due to the rise in global prices of crude oil.

The price of kerosene rose by 91.12% in April compared to a year ago. This was the highest across all items that the Ministry of Statistics and Programme Implementation tracks.

Petrol for vehicles saw prices rise by 21%, while the cost of diesel for vehicles rose by 16.23%.

Lemon prices were next up, rising 66% over last year. Green chillies, cauliflower, cabbage are other vegetables that have seen among the sharpest price rises.

Price increases are being seen across a number of groups, said Sunil Kumar Sinha, principal economist at India Ratings & Research. This is led by cereals and products (21-month high), vegetables (17-month high), spices (17-month high), Sinha said.

Overall, consumer food price inflation jumped to a 17-month high of 8.38%.

Food and fuel prices can be volatile. Often, elements outside the control of policymakers can push up prices in these category. For instance, at present, the Russia-Ukraine crisis is pushing up cost of wheat and edible oil. Global fuel prices have also risen due to the conflict.

However, inflation in India is now more generalised.

Core inflation, which excludes volatile food and fuel, also soared to the highest in eight years. One core category — clothing and footwear, is now seeing inflation in nearly double digits.

Core inflation at 7.2% year-on-year was unusually strong, said Gaura Sen Gupta, economist at IDFC First Bank. "This indicates that inflation impulses are broadening with producers passing-on input cost pressures to consumers."

Alongside, food, fuel and manufactured goods, a category called 'miscellaneous goods and services' saw inflation rise to the highest in 115 months, according to India Ratings & Research.

The rise was led by a rise across categories, including transport and communication, household goods and services, health, recreation and amusement and education.

Health inflation, in particular, is turning structural, having stayed above 6% for the last 16 months, said the rating agency.

So how will inflation be brought under control?

There are no easy answers here.

The government can take some steps. For instance, it can still bring down excise duties on fuel products. States can also bring down the taxes they impose on these products. Government can also try and manage supplies of agricultural commodities in a way that price rises are kept in the check.

The central bank, on its part, has only one tool — higher interest rates. However these higher rates will dampen demand in an already weak economy. It may have no choice though.

Nomura now expects inflation to average 7.2% in FY23 and sees stronger rate action ahead.

“The RBI’s surprise intermeeting hike was partly in expectation of elevated inflation in April, but we believe substantial policy catch-up is still needed,” said Nomura economists Sonal Varma and Aurodeep Nandi. “We continue to expect more frontloaded rate hikes: 35bp in June, followed by 50bp in August and 25bp at subsequent meetings until April 2023. We expect the repo rate at 5.75% by December 2022 and at 6.25% by April 2023. “