Retail inflation to breach 8 per cent level in January: SBI research

Shishir Sinha | Updated on January 14, 2020

Retail inflation is likely to breach 8 per cent in January and then start bottoming out.   -  Reuters

Report questions Central Statistical Organization’s methodology for preparing, disseminating inflation data

Bad news on the retail inflation front is likely to continue at least for one more month as SBI's research has estimated that the rate of retail inflation is likely to breach 8 per cent in January.

It has also questioned the data methodology of the Central Statistical Organization (CSO), the Government organisation responsible for preparing and disseminating retail inflation data. This rate is represented by the Consumer Price Index (CPI) and released every month.

Read also: December retail inflation spikes to 5-year high

On Monday, the rate of retail inflation jumped to an over five-year high of 7.35 per cent on the back of a significant increase in ginger, onion and potato (GOP) prices. Stripping aside the GOP impact, headline inflation declined to 4.48 per cent. The impact of an increase in the telecom tariff has added another 16 bps to inflation.

"We now expect inflation to breach 8 per cent in January and then start bottoming out. However, this jump in inflation will force the RBI to relook at the inflation trajectory, but in our view any change in stance could be unwarranted as we find compelling evidence of a significant slowdown in discretionary consumption," the report said.

The latest rate is much above the targeted inflation rate of 4 per cent, with a two per cent swing in both directions. This means that the Monetary Policy Committee (MPC) under the Chairmanship of the RBI Governor, will press the pause button for a longer period, which would rule out an interest rate cut on loans for industries and individuals.

The report believes that RBI missed the bus in cutting rates in December. “Our worry is that if food price inflation does not revert, we can slip into stagflation. Our inflation trajectory shows headline inflation will only materially decline beyond September, with December 2020-January 2021 inflation declining to below 3 per cent. This means RBI will possibly remain on hold in calendar 2020, going by current trends. We, thus, expect G-Sec yields to inch closer to the levels they were at before operation twist started (6.7 per cent)," the report said.

The imminent fear looming ahead is an increase in protein inflation going forward, after the whopping increase in vegetable prices. Our Granger casualty tests shows that an increase in the vegetable inflation Granger causes an increase in protein inflation, with a lag of two months. One of the plausible reasons for this is that people might shift from costly vegetables to pulses/ eggs/ meat, which, would subsequently lead to a further increase in prices.

According to the report, it was ironical that while paddy procurement by the Food Corporation of India (FCI)/ state agencies for the Kharif Marketing Season (KMS) started in October 2019, many states such as West Bengal, Karnataka, and Rajasthan were yet to start paddy procurement, while procurement in Tamil Nadu, Bihar and Jharkhand (as on January 13) was less than 5 per cent of the total procurement in the previous season (KMS 2018-19). This, again, exposes the problems Indian farmers face in getting proper remuneration for their crops. The coming Budget must shed its inhibitions about reforming the agri sector.

The uptick in international food prices through the import channel would have some bearing on the overall trajectory of CPI (combined) inflation. The imported inflation component of CPI has registered an uptick since November. The only redeeming feature was the growth in IIP in November. Specifically, for the year as a whole, the strong growth in intermediate goods was attributed to high intermediate demand from chemical products and metals.

"We are staring at low growth and high inflation, at least for H1FY20. Difficult times indeed! Unfortunately, the CSO methodology of using CES Survey data has resulted in CPI being overstated by 200 bps. It’s high time we question the CSO methodology of CPI estimation, as it results in erroneous policy decisions," the report concluded.

Published on January 14, 2020

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