Inflation In India - What's Next?
We find two distinct inflation impulses (defined as above seasonal MoM changes in the consumer price index, or CPI) behind the rise in India’s CPI inflation from 4.3% YoY in Sep-2021 to 7.8% in Apr-2022.
The first, between October and December last year, was nearly all due to vegetables. High vegetables inflation may persist for a few more months (e.g., tomatoes hurt by the heatwave), but the range of prices of major vegetables has not changed meaningfully in the past decade. In our view, this is because local factors drive most costs (like rent, labour, finance). Of these, we need to watch wage inflation. For now, though, while demand for NREGA work (higher demand implies more joblessness) has fallen from the peak, it is still a bit above pre-Covid levels. Other domestic drivers of recent inflation also appear temporary: the recent rise in cereals inflation is mainly due to a low base (free-grains scheme) and can self-adjust, and Telecom ARPU may rise further but is already 30-80% off the trough.
In the second, in March and April this year, we observe that global price changes significantly affect four of the top five contributors, i.e., Transport & Communication, Fuel & Light, Oils/Fats, Cereals, and Eggs/Fish/Meat. More than half of this second inflation impulse has been due to global factors.
Risk of new impulses may still be higher globally, especially if crude rises further. CPI has now largely adjusted to US$105/bbl crude, as have freight rates, but US$120/bbl can mean another 2% of PFCE worth of impact (moderated by the government cutting excise duty on fuel last weekend). On the other hand, YoY comparisons are falling for most metals as the downward lash of the supply-chain bullwhip starts (weak end demand with high inventories) and could fall further. The wage-price spiral in US services has limited the near-term impact in India.
Though we expect muted incremental inflation impulses, several remaining uncertainties keep us cautious about headline inflation. In a tight global market for food (fertiliser shortages can make these persist for longer), even minor weather disruptions can have a disproportionate impact (as seen in wheat post-India's export ban). The expectation of a significant surge in fixed-assets investment in China to help stimulate growth after stringent Covid lockdowns can keep metal prices higher than otherwise. However, as the price inflation in hard commodities fades, margin pressure could abate, particularly for automakers. If Palm oil prices moderate, some staples firms could see relief.