In October 2020, the Consumer Price Index based retail inflation reached to nearly 6 ½ year high at 7.61%, highest since June 2014. It was higher than 7.3% in September (final) and 4.6% in October 2019. The reading came higher than our estimate of 7.4% for the month. For 13 months in a row the retail inflation remained above the RBI’s 4% inflation target while it breached upper tolerance level of 6% for successive 7 months.
On year on year basis, inflation was higher across main segments barring housing. On a month a month basis however, further uptick in food inflation, housing, and clothing and footwear led to increase in inflation in October 2020. Consumer food price index (CFPI) remained at a double digit level 11.07%, higher than 10.68% in September 2020.
In October 2020, core inflation increased by another 10 bps to 5.8% when compared with the previous month. Rural and urban inflation a like remained above 7% mark with rural inflation surpassing urban inflation.
• Food prices firmed to 6 month high of 10.2%, higher than 6.9% in the same month of last year and 9.7% in September 2020. Supply side disruptions, prolonged monsoons and crop damages in Deccan area continued to exert upward pressure on food articles.
o Under the food segment, increase in prices of vegetables and proteins kept the inflation elevated. Inflation in meat and fish (18.7%), eggs (21.8%), oils and fats (15.2%), vegetables (22.5%), pulses (18.3%), spices (11.2%) remained in double digit.
o On month on month basis, vegetable prices rose by 1.8% to 22.5% in October 2020 from the previous month partly due to supply led disruptions and crop damages due to excessive rains in the part of the country.
• Inflation in pan, tobacco and intoxicants remained nearly unchanged from a month ago at 10.7%, much higher than 3.9% in October 2019.
• Inflation in case of clothes and footwear increased by 10 bps to 3.2% in October 2020 than a month ago level.
• Housing inflation increased by 40 bps to 3.3% than 2.8% in September 2020 though was lower than the 4.6% in October last year.
• Fuel and light inflation registered sustained moderation in 4th consecutive month at 2.3%, lower than 2.9% in the previous month though higher than -2% in October 2019. Reduction in LPG prices and muted global crude oil prices kept lid to this segment.
• Inflation in miscellaneous components remained nearly unchanged from a month ago level at 6.9%. However, it was higher than 3.5% in October 2019.
o Transportation and communication remained higher at 11.2%. Higher fuel costs prompted by higher taxes have kept transport inflation on the higher side.
Core CPI
Core inflation increased by 10 bps in October 2020 to 5.8% higher than 5.7% in the previous month and 3.5% in October 2019. The increase can be ascribed to increase in housing and sustained elevated inflation in pan and tobacco, clothing, and miscellaneous segments.
State-wise inflation
21 states, which have reported inflation for September 2020 have been plotted in Exhibit 3 along with inflation in the corresponding month last year. There are 11 states which have recorded inflation more than the average all India retail inflation for the month. When compared with the same month a year ago, the inflation surged in Bihar, Telangana, Chhattisgarh, Odisha, West Bengal and Andhra Pradesh.
Rural vs Urban Inflation and CPI vs WPI
The inflation in October 2020 increased in rural as well as urban areas and reached to a 9 month high. In October 2020, the urban inflation was at 7.4% while inflation in the rural area was at 7.7%, 30 basis points higher than that of urban area.
CARE Ratings’ View:
Inflation will remain elevated for the next few months driven primarily by food and miscellaneous segment. High inflation gives no scope to MPC to lower rates further this year. The RBI action will be through the liquidity route henceforth.
