New Delhi, Feb 15 (Mayank Nigam) The domestic CPI data released recently appears to have delivered a double whammy, with the seemingly abnormal jump in cereals prices lying somewhere between a statistical error and the offshoot of certain unintended policy alterations, aggravating policy makers’ dilemma unfathomably, according to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India. A close observation indicates that the main culprit of the CPI increase is decade-high cereals inflation of 16.12%. While cereals inflation is exhibiting increasing trend for the past 2 years, the latest increase in perplexing. There are several reasons for this, he said.
Firstly, this is the first time that difference between the weighted contribution of cereals CPI and calculated cereals CPI (sum of item-wise) is so large (19 bps). The average difference between Jan’15 to Dec’22 is merely 3 bps indicating that this month CPI data has an upward bias. This is an unexplained behaviour exhibited first time in cereals inflation but it has been a recurring feature of fuel and light inflation where the trend is opposite with the overall weighted contribution lower than the sum of its components, by around 18 bps beginning January 2022 and is still continuing. This indicates CPI numbers earlier reported could have a downward bias. These contrarian trends in CPI data by following a top-down and bottom-up approach is perplexing, to say the least. Secondly, since Jan’23, GoI merged the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) free food grains with Antodaya Anna Yojna (AAY) that has discontinued extra food grains supplied under PDS. As a result, in Jan’23, the weighted contribution of rice/wheat other sources has also increased by 7 bps in CPI inflation.
Interestingly, this has increased by 20 basis points since October 2022. “We believe a different methodology regarding the calculation of Cereal inflation has made this jump feasible. The quantity available from the Public Distribution System (PDS) is evaluated at the administered price in the National Account Statistics, while the cost actually paid by the households for the quantity obtained from the PDS are recorded in the Household Consumer Expenditure Survey (HCES) based on which the CPI is estimated. There has been no HCES since FY12. Given that households are now supposed to pay for food grains for an additional 5 kg, the CSO has imparted a hypothetical cost of purchase to such. This has pushed up the cereal prices,” Ghosh said. Thirdly, it is perplexing to note that there is no linkage/data due diligence between vegetable prices tracked by the Ministry of Consumer Affairs (Tomato, Potato & Onion/TOP) and CPI data. For example, in the current month even as vegetable prices tracked by Ministry have crashed by 10%, it shows a decline of 4% in CPI data. This anomaly is making it a nightmare to predict vegetable price data. For the record, the TOP on average contributes around 45% to overall vegetable prices, he said. Thus, there is an unexplained gap of around 19 basis points in 6.52% inflation number.
If we add to this, the 7 basis points of the PDS gap, the total gap is around 26 basis points in 6.52% number. However, if we adjust for the downward bias in CPI fuel number of around 18 basis points, the headline CPI inflation for January is not much different from 6.52% Additionally, the Core CPI also increased to 6.22% in Jan’23 as compared to 6.10% in Dec’22, Ghosh said. However, the core CPI data since June 2014 indicates that stickiness is the normal property of core inflation. In fact, since January 2012, the average core CPI is 5.8%. This has more to do with post pandemic expenditure shifts on health and education and purchase of gold. Moreover, the distribution of core CPI indicates a nicely shaped Bell curve, with few outliers. Data trends suggest that it is almost improbable to break down core CPI to below 5.5% in a meaningful manner, he said. “Our analysis using different scenarios of food and core inflation to predict some possible values of CPI inflation points out that only in one scenario (out of 15 realistic scenarios), CPI inflation comes below 6%.
If CPI inflation needs to be below 6% then food inflation has to be below 5.5%. As core inflation is sticky in the range of 5.75%-6.25%, any meaningful decline in CPI is possible through food inflation only which is unpredictable given the reasons cited above,” Ghosh said. “All these reasons make us believe that RBI policy choices could get obfuscated and the repo rate stays higher for longer. Also, liquidity deficit in the system has imparted an additional 25 basis point hike in terms of rate premium. The problem is in the past also there have been several data issues, like the IIP sample failing to recognize that India is now home to second largest mobile phone manufacturer, the health spike in CPI are all examples of data goof ups. Time to rectify?” he added.