Surge in retail inflation in November brings RBI’s fears to reality

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Inflation based on the consumer price index rose to 4.88% in November, the fastest increase in 16 months, driven by the rise in vegetable prices and an increase in fuel inflation.

Vegetable prices rose 22.48% year-on-year, the most pronounced since the double-digit inflation episode at the beginning of 2013. Whereas vegetable prices had fallen by 10% in November last year, here there is a statistical basis effect.

Food inflation doubled to 4.41% in November from 2.26% in October and the rebound in the price increase was reflected in almost all categories except pulses, whose prices continued to fall. Vegetables may be the main culprit, but the acceleration of inflation is not limited to the food segment alone.

The recent increase in world crude oil prices was reflected in the increase in fuel inflation. Fuel prices increased for the sixth consecutive month, increasing 7.92% in November. Considering that the increase in oil prices continues unabated, this is not a good sign. The acceleration of fuel inflation means that general retail inflation and even food prices will continue to rise in the coming months as fuel permeates all of the economy’s activities.

The effect of wage increases for government employees was evident by the increase in housing inflation to 7.36% from 4.98% a year ago.

However, the most disturbing sign is the increase in core inflation, which the Reserve Bank of India (RBI) is closely monitoring. Core inflation, which excludes food and fuel, rose to 4.83% and this places it firmly above the medium-term objective of 4% of the central bank. Core inflation has historically been more rigid than other components, especially downward.

If you look at the graph of RBI fanatics in the December policy, the central bank had given extensive warnings about where inflation is headed. In fact, RBI had raised its inflation forecast for the second half of the fiscal year for the second time to 4.3-4.7%.

Markets expected a strong increase in retail inflation in November and consensus estimates had put CPI inflation at around 4.45%. But the magnitude of the rise has perplexed many.

The central bank’s survey of professional forecasters had put retail inflation at 4.4% and core inflation at 4.5% in March. Inflation in November has altered these statistics and the prospect of a rate hike now seems more imminent.

The debt market environment has already changed, and the yield on 10-year government securities reached an intraday high of 7.23% on Tuesday. With this impression of inflation, bond yields are likely to increase further.