e Economic Outlook ANALYSIS 14 OCT 2022 04:50 PM CMIE projects elevated inflation in 2022-23 7.607 py (yoy % change) 7.40 73 7.20 10 7.00 69 MIE forecast 6804 67 6.60 gs 6.40 64 63 6.20 6.00. 5.80 5.60 cS 5.40 seo “eo 49 4.80 4.60. a i i Mar 20 Sep 20 Mar 21 Sep 21 Mar 22 Sep 22 Mar 23 Quarter-ended Centre for Monitoring Indian Economy Pvt. Ltd., 14 Oct 2022 Inflation expectations are high by Mahesh Vyas Inflation rose to 7.41 per cent in September 2022. This is much higher than India's target inflation rate of 4 per cent and also well beyond the upper tolerance limit of 6 per cent mandated by Parliament. Since January 2020, inflation has consistently remained above the 4 per cent target set by policy makers. It has also been higher than the upper policy tolerance limit of 6 per cent in 21 of the 33 months since January 2020. There seems to be a greater acceptance of inflation rates that are much higher than those mandated by the governing bodies in India India set on a path of inflation targeting in August 2016 with a target of 4 per cent and a tolerance band of 2to 6 per cent. The average monthly inflation rate since then works out to 4.8 per cent. ‘The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has been raising interest rates to rein in inflation only since May 2022. This was after inflation touched 7.8 per cent in April 2022. Earlier, the RBI's MPC and the government decided to support growth instead of raising rates to control inflation. Now, apparently, the RBI believes that inflation will remain elevated for another two years. The RBI Governor is reported to have stated during a post-policy interaction with the media on September 30 that they expect inflation to come closer to the 4 per cent target over a two year cycle. The term cycle is somewhat enigmatic. Nevertheless, it seems that the RBI is anchoring inflation expectations higher than the 4 per cent target for about two years. Consumers have a similar expectation. According to RBI's survey around September 2022 when inflation was close to 7 per cent, 59.9 per cent household respondents expected inflation to rise in three months and 68.1 per cent of the respondents expected it to rise in a year. The proportion of household respondents who believe that inflation is expected to rise over the next three or 12 months has been rising since early 2015.Interestingly, consumer expectations of inflation have moderated after the RBI started raising rates. Around March 2022, 67 per cent of respondents believed that inflation would be higher in three months. This ratio has since dropped to less than 60 per cent. Similarly, the proportion of respondents who believe that the inflation would be higher over a 12-month period has dropped from 71 per cent to 66 per cent. RBI's surveys in September 2022 show that consumers perceive inflation to be around 10 per cent and expect it to go up to around 11 per cent in a 3 to 12 month period. What is noteworthy again is that the range between perceived and expected inflation rate over a 3 to 12 month period has narrowed from 1 to 1.2 percentage points 100.6 to 0.8 percentage points between July and September 2022, While consumers overstate inflation compared to the official estimates, professional economists seem to be under-estimating inflation. They expected the July-September quarter to end with an inflation rate of 6.1 per cent while the actual inflation rate was 7.04 per cent. Now, they expect inflation to come down to 6 per cent in the quarter of October-December 2022. MIE expected an inflation rate of 7 per cent in the quarter of July-September 2022 and it expects the October- December 2022 quarter to end with an inflation rate of 6.7 per cent. CMIE expects inflation to average at 6.8 per cent in 2022-23, 5.4 per cent in 2023-24 and 5 per cent in 2024-25. We agree with the Governor that inflation will not come down to 4 per cent in two years, Professional forecasters believe that inflation in 2022-23 would be 6.7 per cent and in 2023-24, it would be 5.2 per cent. All forecasts quoted here are median values. Evidently, nobody buys the 4-per cent mandated rate decided by Parliament. Inflation expectations for the next couple of years seem to circumambulate around 6 per cent. Inflation projections face an upside risk because of the greater momentum in non-core component of the consumer price index (CPI). Prices of food and fuel that comprise the non-core component have been rising at the rate of 0.99 per cent per month during April September 2022. This is much higher than the core component of the index which has been rising at a much slower 0.54 per cent per month. Non-core commodities account for a substantial 45.9 per cent of the total weight in the CPI. Of this, food accounts for the bulk of the weight 39.06 per cent. Food inflation reached a 22-month high of 8.6 per cent in ‘September 2022. This was driven by a spike in inflation in vegetables, spices and cereals. Vegetable prices are usually volatile and spices has a relatively small weight. The problem is in prices of cereals which saw an inflation rate of 11.5 per cent. This is exceptionally high, the highest recorded since 9 years, Unseasonal rains in October could keep vegetable prices high for some time and a poor khatif rice crop is expected to keep cereals prices high. Food inflation therefore is expected to remain elevated. Fuel and light prices face uncertainties because of geopolitical reasons. While fuel prices have stabilised in recent months they continue to remain quite elevated at over 10 per cent, Current conditions suggest that non-core inflation will continue to remain high with pressures that may push them higher. Core inflation, which is expected to be more amenable to policy interventions seems to be in better control. The average monthly growth in core inflation during ApritSeptember 2022 at 0.54 per cent was only 0.03 percentage points higher than the average monthly growth during fiscal 2021-22. This is much smaller than the increase in non-core inflation which rose by 0.37 percentage points from 0.616 per cent per month in 2021- 22 to 0.992 per cent per month during April September 2022, The uncertainties are therefore in non-core inflation, Core inflation may remain in better control, But, even core inflation was too high at 6.2 per cent in September 2022. 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