Costlier food items — especially vegetables, eggs and fruits — and fuel in November drove up CPI inflation by 1.30 percentage points to 4.88% from 3.58% in October. It shot by 1.25 percentage points from a year earlier, when it was 3.63%.
Just when it seemed that green shoots of economic recovery were appearing, two macroeconomic data — consumer price index (CPI) inflation for November and Index of Industrial Production (IIP) of October — published by the government on Tuesday have put economists in a cautionary mode.
Costlier food items — especially vegetables, eggs and fruits — and fuel in November drove up CPI inflation by 1.30 percentage points to 4.88% from 3.58% in October. It shot by 1.25 percentage points from a year earlier, when it was 3.63%.
The retail inflation numbers published by Central Statistics Office (CSO) of ministry of statistics and programme implementation on Tuesday showed that the whopping jump in the retail inflation last month was mostly due to vegetable prices soaring 22.48% with prices of tomatoes and onion shooting through the roof.
Other food items, whose prices climbed over 7% in November were eggs (7.95%) and sugar and confectionary (7.80%). The overall consumer foods price index (CFPI) last month rose 4.42%, up from 1.9% in October.
November's 15-month high CPI inflation was also scorched by fuel and light inflation rising 7.92%, which was higher compared with October's 6.36% and September's 5.56%. The month also saw core inflation also move up 23 basis points (bps) to 4.86% from 4.63 a month before.
Worried by inflation heating up in recent months, government-owned oil firms skipped the monthly hike on subsidised LPG cylinder for the first time in 17 months in December. This month, the oil companies did not raise prices of subsidised LPG cylinders ahead of Gujarat elections but raised prices of non-subsidized LPG cylinders by Rs 5 per cylinder to Rs 747.
Oil firms had increased the prices of subsidised LPG cylinders by Rs76.5 in 19 instalments over the past 17 months.
Last month's retail inflation not only dashes all hopes of a repo rate by Reserve Bank of India (RBI) but also raises the fear of inflation target of between 4.3% and 4.7% for the second half of the current fiscal being breached.
After seeing CPI inflation climb beyond their expectation, many economists said they would be revising their forecast for second half of the current year to bring it nearer to 5% and whole year forecast to slightly over 4%.
D K Srivastava, chief policy adviser at EY India, said one would have wait for one more month to see whether retail inflation would exceed RBI's target in the second half of the current fiscal. For the whole he expects the inflation to come at 4.4%, with first half inflation average at a little above 2%.
Srivastava said EY might revise its retail inflation outlook for second half of the year to 4.8% from 4.5% and for the whole year to a little above 4% from earlier below 4%.
According to him, rise in food prices was temporary and is likely to correct soon. However, he does not expect cut in repo rate for some time now. Neither does he expect a hike as despite the gross domestic product (GDP) growth picking up, overall economic growth was still weak.
The IIP number released on Tuesday revealed that factory output was subdued in October at 2.2% compared to 4% a month earlier due to slower growth in manufacturing.
Srivastava attributed lacklustre IIP numbers to impacts of shoddy introduction of goods and services tax (GST) and base effect. With the negative impact of GST waning and demand for manufactured picking up, he projected manufacturing to look up in months ahead.
"Until last month, manufacturing was rather weak but with effects of GST now waning and demand for manufactured products increasing, manufacturing might start to look up. There was a base effect in October number (but I) expect it (IIP) to move up in November," he told DNA Money.
Aditi Nayar, principal economist of credit rating firm Icra, said the "uptick in the CPI inflation in November was significantly sharper than expected, validating the caution displayed by the Monetary Policy Committee in its recent reviews".
"The hardening of retail inflation in November 2017 was broad-based, with negative surprises not restricted only to food items, but posted by many of the sub-groups. For instance, core inflation recorded a broad-based uptick to an eight-month high 4.9% in November from 4.6% in October," she wrote in a statement issued by Icra.
She feel the factors that drove up inflation last were "transient" but projects CPI inflation to remain elevated between 4.4% and 4.7% for the rest of the current fiscal.
"The impact of the reduction in GST rates on a number of items may pass through into retail prices and inflation in the coming weeks. However, the continued impact of the HRA (house rent allowance) revision on housing inflation and elevated fuel prices suggest that the CPI inflation is likely to print in a range of 4.4-4.7% in the remainder of FY2018," said Nayar.
According to her, with the "CPI being heavily weighted toward food items and the prices of which are sensitive to small changes in supply-demand dynamics, volatility in the monthly CPI inflation readings would persist".
"In our view, this would continue to impart a cautious bias to monetary policy setting in India. Our baseline expectation heading into 2018 remains of an extended pause for the policy rate," she predicted.
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