CMIE Economic Outlook for November

Retail price inflation touches 77-month high

Retail price inflation in India rose to 7.6 per cent in October 2020 from 7.3 per cent in
September 2020. Popular expectation was that inflation would remain elevated in October.
But, its further advance came as a surprise. A poll of 50 economists conducted by Reuters
had projected inflation to measure 7.3 per cent in October, almost unchanged from the
preceding month.

With its October rise, retail price inflation touched its highest level since May 2014. Food
inflation continued its upward march and, core inflation too inched up further.

Prices of food & beverages increased in October 2020 by 2.1 per cent from their September
2020 level. Consequently, food & beverages inflation increased to 10.2 per cent in October
2020 from 9.8 per cent in September 2020. Vegetables, egg, fish & meat, oils & fats, pulses
and non-alcoholic beverages drove the rise in food inflation.

Vegetable prices continued rising unabated, gaining 10.3 per cent sequentially in October
2020. Compared year-on-year, vegetable prices were higher by 22.5 per cent. This is the
highest inflation witnessed by vegetables since April 2020. Despite a bumper kharif output,
inflation in pulses climbed to 18.3 per cent from 14.7 per cent in September and that in oils &
fats rose to 15.2 per cent from 14 per cent. Inflation in egg, fish & meat too rose by 1.7
percentage points to 18.7 per cent and 8.4 per cent, respectively, in September. Inflation in
spices inched down from its September level of 11.7 per cent, yet remained elevated at 11.3
per cent in October.

Core inflation, which excludes items such as food and fuel, which are vulnerable to supply
shocks, rose to 5.7 per cent in October 2020 from 5.5 per cent in September. This was the
highest core inflation witnessed by India in the last two years, which looks odd when seen on
the backdrop of slump in domestic demand due to the Covid-19 induced lockdown. Core
inflation has risen steadily this year, from 3.8 per cent in March 2020 to its recent level of 5.7
per cent in October 2020.

High retail inflation poses a risk to the Reserve Bank of India’s (RBI’s) current
accommodative stance. Retail price inflation has remained above the RBI’s tolerance band of
2 to 6 per cent for the 7th consecutive month in October. As per the RBI Act, if inflation
remains outside this band for three consecutive quarters, then the regulator needs to submit a
report to the government explaining reasons for its failure, propose remedial actions and the
time period within which the inflation target would be achieved.
 Consumer Price Index (Y-o-Y % change)
Food & Pan & Clothing & Fuel &
CPI Housing Miscel.
beverages tobacco footwear light
Weight 100 45.86 2.38 6.53 10.07 6.84 28.32
Oct 19 4.6 6.9 3.9 1.7 4.6 -2.0 3.5
Nov 19 5.5 8.7 3.3 1.3 4.5 -1.9 3.7
Dec 19 7.4 12.2 3.4 1.5 4.3 0.7 4.2
Jan 20 7.6 11.7 3.7 1.9 4.2 3.7 4.8
Feb 20 6.6 9.5 4.1 2.1 4.2 6.4 4.5
Mar 20 5.8 7.8 4.7 2.1 3.7 6.6 4.4
Apr 20 7.2 10.5 5.9 3.5 3.9 2.9 5.4
May 20 6.3 8.4 6.3 3.4 3.7 1.6 5.8
Jun 20 6.2 7.9 11.3 2.7 3.6 0.5 6.1
Jul 20 6.7 8.5 10.5 2.8 3.3 2.7 6.8
Aug 20 6.7 8.3 11.2 2.8 3.1 3.2 7.0
Sep 20 7.3 9.8 10.7 3.0 2.8 2.8 6.9
Oct 20 7.6 10.2 10.7 3.2 3.3 2.3 6.9