Retail inflation rises to 6.01%, WPI eases to 12.96% in Jan: What lies ahead?

The first month of 2022 witnessed another spike in retail inflation at 6.01 per cent, the highest since June 2021, government data showed on Monday. The Consumer Price Index-based inflation stood at 5.56 per cent in December. It hit the upper end of the Reserve Bank of India target range of 4 per cent (+/-2), according to data released by the Ministry of Statistics and Program Implementation (MoSPI).

However, the whole sale inflation cooled down a bit to 12.96 per cent in January from 1.56 per cent in December, the data showed. It should be noted that the WPI inflation has remained in double digits for the tenth consecutive month beginning April 2021.

"As feared, an unfavourable base hardened the year-on-year CPI inflation to a seven-month high, printing marginally above the 6.0 per cent upper threshold of the MPC's medium term forecast range for the first time since June 2021, and exceeding our forecast of 5.9 per cent. Interestingly, while the urban inflation remained unchanged at 5.9 per cent, the rural CPI inflation surged to 6.1 per cent in January 2022 from 5.4 per cent in the previous month, reversing the gap between the two metrics." Aditi Nayar, Chief Economist at ICRA said.

Throwing light on the WPI inflation, Nayar added, "The WPI inflation did recede in January 2022 led by a welcome decline in core items, manufactured food products, and crude petroleum and natural gas, while exceeding our forecast of 12.7 per cent. Discomfortingly, primary food and non-food articles, and minerals, recorded a pickup in the YoY inflation in January 2022 relative to December 2021."

Moreover, the retail inflation was higher in rural India at 6.12 per cent while it was at 5.91 per cent in urban area.

"While the CPI inflation for Jan 2022 has touched RBI's upper tolerance band, the positive aspect is that CPI inflation has fallen on MoM basis. The sequential fall has been possible mainly because of softening of food prices. However, the concerning aspect is that the core inflation has remained above 6 per cent," Rajani Sinha, Chief Economist, Knight Frank said.

Attributing the reasons for inching up inflation, Nayar further said, "The sequential hardening in the CPI inflation in January 2022 was driven by food and beverages, and clothing and footwear, whereas pan, tobacco and intoxicants, fuel and light, miscellaneous items and housing displayed some welcome cooling. While the rise in the food and beverages inflation can be attributed to an unfavourable base, the hardening in the inflation for clothing and footwear was underpinned by a sharp 1.0% MoM rise in prices, suggesting that margin pressure forced producers to raise prices in spite of the unfolding third wave."

Road Ahead For India's Inflation

Going forward, Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services Ltd believed that CPI- inflation has peaked and likely to soften to 5.6-5.7 per cent in Feb-Mar 2022. Joining the chorus, Nish Bhatt, founder and CEO of Millwood Kane International, said, "Though the retail and wholesale inflation has been rising and stayed elevated for a few months, a soothing factor for the market has been the comment by the RBI Governor last week. The rising inflation is not a matter of concern for the central as the focus remains on growth. As per RBI inflation is likely to ease as progress further in CY22. Ease in geo-political tensions, subsequent fall in crude prices, and a good monsoon year will help ease in retail inflation."

Similarly, Nayar of ICRA concurred with the MPC that the CPI inflation will peak in the ongoing quarter, but it may not moderate as quickly as projected, especially if domestic demand rebounds quickly after the abating of the shallow and less severe third wave.

However, According to Sinha of Knight Frank, the sharp rise in global crude oil prices and its impact on CPI inflation will be a cause of concern for the RBI."While the Central Bank has given benign inflation projection for FY23, it will be critical to watch what happens to commodity prices and specifically global crude oil prices in the next few months," Sinha added.

Globally rising inflation

Retail inflation is not rearing its head only in India but it has emerged as the problem across the world. Earlier this week, the retail inflation jumped to 7.5 per cent in January, which is the highest since 1982.

Similarly, Italy's statistics agency, earlier this month showed inflation rose by 3.9 per cent during 2021, hitting 4.2 per cent in December - the highest rise in over a decade. Germany is also reeling under highest inflation levels in last many years, currently the inflation in Germany stands at 4.9 per cent which is lesser than 5.3 per cent in December, the inflation breaching 5 per cent level was the second time since reunification in 1990s.

In the list of countries witnessing inflation at decadal level high is the UK, the CPI rose to 5.4 per cent in December, highest since March 1992.

Also read: Momentum of inflation from Oct on downward slope: RBI Gov Das

Also read: Retail inflation surges to 6.01% in Jan, breaches RBI's target range