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Vegetables and gold mute inflation, but risks building
Jul CPI inflation came in at a 19m high of 4.45% - just below our expectations. The numbers might have been higher still but for a high vegetables’ base (that fades by Sep) as well as lower gold prices that kept core inflation contained at 3.9%. Underlying inflation metrics CPI ex vegetables, supercore inflation, and weighted median are all rising from low levels. These are in line with materialisaion of many of the risks we have been pointing at: increase in wheat and edible oils on global factors, higher domestic sugar, as well as transmission of global shocks into airfares, prepared meals, textiles, electronics and durables. Hardening pressures will likely drive eventual normalisation.
Jul CPI inflation rises to 4.45%, food ex-base effects might be higher
CPI inflation rose to a 19 month high of 4.45% - slightly below our projection of 4.50%. The increased inflation was driven largely across subgroups, though this was partly offset by drop in gold/silver (in personal care) bringing core inflation lower. Food inflation showed increases largely throughout, but was pulled lower by a high base in vegetables. Increased prices of cereals (dry European weather) and edible oils (East Asia hit by El-Nino) with global trends are seen. Apart from this, domestic sugar and ginger (83.6% inflation) indicate food prices would have been higher absent the vegetables’ base.
Gradual passthrough of global prices pushing underlying inflation higher
We wrote in our preview of the risks of higher petroproduct prices passing through. These are being seen in as plastics pushing prices of textiles, ATF driving airfares, gas driving cooked meals, and chips driving domestic electronics and appliances. This is seen driving underlying inflation in terms of services, weighted median, etc., while oil sensitive inflation is held back by limited passthrough in pump prices.
Normalisation in rates over the next 12 months, Oct MPC language watched
Language at the last MPC meet indicated Dec as the earliest time for the start of normalisation to neutral rates of 2% (on a real basis). OIS markets price 75-100 bps hikes over the next 12 months. While rates markets already price in this normalisation, trading well above the repo rate, the risk of term premium widening with global trends is a major risk, especially with limited scope for OMO purchases
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