Were May Inflation Numbers an Aberration, Asks SBI
Moneylife Digital Team 13 July 2021
Consumer price index (CPI) inflation moderated marginally to 6.26% in June 2021 from 6.30% in the previous month. Surprisingly, most items in food and non-food have registered a de-growth in June, which raises a broader question whether the May 2021 inflation print was a data aberration, given that most of the country was under the grip of a lock-down in that month, asks State Bank of India (SBI) in a report.
In the note, Dr Soumya Kanti Ghosh, group chief economic adviser of SBI, says, "The decline in June 2021 inflation print reveals an across-the-board decline in sequential momentum. Items in core basket having disproportionately larger weights that had exhibited significant jump in prices in May are now back to trend path. Interestingly this is even more possible as core inflation in May 2021 has undergone a large downward revision."
During June, core inflation also moderated to 6.16%. The headline inflation was much lower than market expectations and surprised pleasantly on the downside. Food items, especially protein items and oils and fats though are still exhibiting increase in prices in contrast with the global trend. 
The Food and Agriculture Organisation of the UN (FAO) food price index (FPI) averaged 124.6 points in June, down 2.5% from May 2021. The decline in June marked first drop in the index following 12 consecutive monthly increases and was brought about by decline in prices of vegetable oils, cereals and, dairy products, SBI says.
The drop in June reflected declines in the prices of vegetable oils, cereals and, though more moderately, dairy products, which more than offset generally higher meat and sugar quotations. 
The FAO Edible Oil Price Index fell by 9.8% in the month, marking a four-month low. The sizeable month-on-month (m-o-m) drop mainly reflects lower international prices of palm, soy, and sunflower oils.
However, SBI says, "in India, oil and fat inflation have risen to 34.8% in June from 30.9% in May 2021 thus showing that the government basic import duty cut on crude palm oil to 10% from 15% and refined palm oils to 37.5% from 45% is not having much impact."
Coming to the other major component fuel, between May and June this year, the international crude prices went up by $6 per barrel. The outlook hinges on the production increases by Organisation of the Petroleum Exporting Countries and their allies (OPEC+). 
SBI says, "The recently cancelled meeting of OPEC+ indicates that we are headed towards elevated levels in Brent and this will have cascading impact on fuel inflation in India. For India, the rising crude oil prices, have led to challenges for the government as it tries to balance the need for extra revenue from high excise duties with rising fuel inflation and its impact on overall inflation. Our calculations show that with every 10% increase in petrol pump prices (Mumbai) there is 50 basis points (bps) increase in CPI."
According to the report, the June 2021 inflation number perhaps reflect another interesting trend. It says, "As consumers are spending more on fuel, it is crowding out expenses on health. Our analysis of SBI card spends indicates that spend on non-discretionary health expenditure has been substantially reduced to accommodate increased expenditure on fuel. In fact, such spending has more than crowded out the spending on other non-discretionary items, like grocery and utility services to such an extent that the demand for such products has significantly declined. The share of non-discretionary spend on items like fuel has jumped to 75% in June from 62% in March 2021."
Even though inflation has shown a marginal decline, SBI says, the levels are still elevated and combined with a decline in financial savings, are adding to household challenges. 
According to preliminary estimates by the Reserve Bank of India (RBI), the household financial savings rate in third quarter (Q3) of FY20-21 has come down to 8.2% of gross domestic product (GDP) from 21.0% and 10.4% in the previous two quarters. 
The overall data of all scheduled commercial bank (ASCB) deposits indicates that during in Q1FY22 (Till 18th June), deposits declined by 38%, compared to the growth seen during Q1FY21. 
"This indicates the level of household distress in India. The fact is also validated from the decline in financial savings. Our estimate indicates that during the second wave period of June 2021 over March 2021, the number of districts with deposits outflows might be double than the first wave," the report says. 
Interestingly, the savings rate in US has gone to 34% of GDP in April 2021 from 8.0% in December 2019. 
Various leading indicators, including port cargo traffic, freight traffic, railway freight earning, manufacturing PMI, steel consumption have worsened sequentially in June 2021 compared with their levels in May. Also, the second wave of the pandemic is exhibiting a fat tail with daily new cases in India still above 40,000. The seven days (7D) moving average of daily vaccine doses has come down to 3.37 million from a maximum of 6.02 million as on 27 June 2021. 
"We need to increase vaccination speed to defeat the pandemic. If India speeds up the vaccination rate to 70 lakh per day, then the entire adult population can be covered by the end of FY21-22. On the other hand, around 33% of the adult population has at least got the first dose and we should prioritise the rest 30 crore working population to get their first dose before December 2021," SBI says.
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