January 2022 Inflation Print: A Peak before Expected Moderation

22 Feb 2022

India Headline inflation touched the 6.0% mark in Jan-22 led by unfavorable base effects. Citi analysts see this as a near term peak (base effect led by vegetables) and expect moderation over the next 4-5months. Core CPI ex transport and gold rose to 5.7%YY in Jan-22, highest level since Dec-18. FY23 headline inflation is expected to average at 5.0%YY, ahead of RBI’s 4.5% forecast. Key Points appended below:

• 1. Headline Inflation Rises Due to Base Effect: Headline CPI inflation rose to 6.01%YY in Jan-22 from 5.66% in Dec-21 as unfavorable base effects (+60bps) outweighed the subdued MoM momentum effect (-33bps). Core CPI ex transport & gold inflation rose to 5.7%YY in Jan-22 (+7bps). CPI Food & Bev inflation rose to 7-month high of 5.6%YY in Jan-22.



• 2. Divergent Trends in Food Prices: CPI Vegetable inflation rose to 5.2%YY in Jan-22 vs -3.0% in Dec-21, while CPI Food & Bev ex Vegetable fell by 24bps to 5.6%YY in Jan-22. The unfavorable base effects from vegetable has outweighed other food products. CPI Oil & Fats continued its downward trajectory to a 14-month low of ~19%YY. Momentum in cereal prices increased in the last 3 months. Inflation in cereals and pulses need to remain very low on the back of bumper winter crop harvests, for the RBI’s inflation forecast to materialize.



• 3. Core CPI under Pressure: Citi analysts preferred series to track underlying price pressures, Core CPI ex transport and gold rose further to 5.7%YY in Jan-22, highest levels since Dec-18. The trend of elevated inflationary pressures was evident with other measures of core inflation like the trimmed mean also trending higher.
• 4. Fuel Prices: As per our Oil & Gas sector analysts’ hike in fuel prices is likely after the state election cycle ends in early-March. Fuel prices (ex-taxes) have remained broadly unchanged over the last two months, despite a ~30% jump in brent prices in Nov-21 and Jan-22.



• 5. Headline inflation - Risk to RBI forecast: Citi analysts expect average FY23 headline inflation at 5.0%YY, well ahead of RBI’s 4.5% forecast. They believe that while headline inflation may have peaked at 6.0% in Jan’22, it will moderate over the next 4-5 months.

Summary: Citi analysts expect the RBI to continue with the delayed normalization of monetary policy despite this inflation print and expect the first repo rate hike to likely happen in October (from August earlier). The normalization of the repo-reverse repo corridor could happen simultaneously with the first repo rate hike.

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