The good and bad of CPI data

Inflation may have peaked in April but is still above normal levels and may not ease soon

Consumer Price Index (CPI) data for the month of May shows a broad-based moderation in inflation. Headline CPI has come down from its eight-year high of 7.79% in April 2022 to 7.04% in May. Core inflation — it is the non-food, non-fuel part of the CPI basket — has come down from 6.95% in April to 6.18% in May. Food inflation has come down from 8.31% to 7.97%.

These numbers convey both the good and the bad news. The good news, at least as of now, is that inflation might have peaked in April. This is more a result of a favourable base effect — CPI growth in May 2021 was 6.3% — than a benign increase in prices. The “as of now caveat” is important because it is difficult to predict crude oil price trajectory in the near term. There are multiple unknowns operating at the moment. The reopening of the Chinese economy can push prices higher, the US might release its strategic reserves to bring down domestic oil prices and international prices as well. India could see further increase in the share of cheaper Russian oil coming into domestic markets. Whether oil stays at Reserve Bank of India (RBI)’S ballpark of $105 per barrel or $150 per barrel over the rest of the year will be the biggest factor driving inflation. The bad news, as can be seen from the May numbers, is that inflation is still way above normal levels and nobody, including the Monetary Policy Committee (MPC) of RBI, expects things to improve anytime soon. MPC bumped up its inflation forecast for the fiscal year by a percentage point to 6.7% last week. This brings up the question of what is to be done? As far as signalling is concerned, RBI has more than demonstrated its resolve to fight inflation by delivering a 0.9 percentage point hike in policy rates within a month and dropping its accommodative monetary policy stance. While this can help the cause of restoring the credibility of inflation targeting, there are limits to how much rate hikes can achieve when inflationary tailwinds are largely supply-side driven. On this count, it will be important to see the Wholesale Price Index (WPI) number for May, which will be released on Tuesday. April was the 13th consecutive month of WPI staying in double digits. It is in this context that the coordination between fiscal and monetary policy arms of the government is a matter of relief. This is all the more important given the challenge of containing inflation without hurting the ongoing economic recovery, especially at the bottom of the pyramid.