INDIA'S INFLATION for households, wholesalers, and producers increased in August. The wholesale inflation rose to an eight-month high of 4.82%, 9.92% and producers' output price inflation to 8.48%. But what is common to all three numbers will worry the Reserve Bank of India.
The central bank's inflation target is spelt out in terms of retail inflation, measured by CPI. And in August, CPI inflation saw some noteworthy developments. To start with, it would be not a question of economists to predict the Monetary Policy Committee will increase the policy repo rate on October 7 by 25 basis points (bps) to 5.5%. This would be the first interest rate hike since February 2023.
According to economists from ICICI Securities Primary Dealership, the MPC's "insistence that current price pressures become more general and terming the supply shock 'does not hold up to scrutiny'".
In contrast to array of input prices already showing up in PPI (Producer Price Index) across the world (including for China an economy known for producer price deflation in the recent past), consumer prices is not a question of but when.
Be that as more so when underlying demand conditions are running strong like in India, they said in a report on Tuesday.
Most notable aspect of August CPI: The jump in sugar prices. The price index for sugar soared 19% in August from July. The year-on-year inflation rate was 9.5%. The price of jaggery was up 9% from July, candy and misri 3%, sweets prepared without milk around 1.3%, and without milk around 1.3%, and jams 0.5%. On the whole, the price index of the 'sugar, jam, honey, chocolate and confectionery' category of the CPI rose 7.6% from July to August and was up 10.85% from last year. And even though this category only accounts for just 1.4% of the entire CPI basket, it was "one of the largest contributors to sequential momentum" and contributed around 15 bps to the headline retail inflation rate of 4.82%, according to the Department of Consumer Affairs. But prices have continued to rise in September. According to that department's data as of September 15, the all-India average retail price of sugar was up 10% in the month, from 60.85 per kg.
Chip price surge: Another small portion of the CPI basket, but one that is starting to higher inflation is goods that contain memory chips. The price of Dynamic Random Access Memory chips — used in everyday electronics — are expected to be up over 400% from the start of 2024 to the end of 2026. This is in stark contrast to DRAM prices fell 90% in October 12 after domestic prices spiked due to lower-than-expected production and multiple typhoons. But prices have continued to rise in September. According to the data, when DRAM prices fell 90% of 70 or 20 years, when DRAM prices fell 90% newspaper has been pointing out for several months that the spiralling price of memory chips for electronics - or 'chipflation' - will soon reflect noticeably in the headline retail inflation rate. It has finally happened. Inflation for the 'information and communication equipment' category rose to 2.95% in August after its index rose on a sequential basis for a third successive month.
The headline 4.82% hides the broadening. Sugar (19% MoM), chipflation (DRAM up 400%), and services are now driving CPI, not vegetables. With 314 of 358 CPI items higher in August vs 256 in July, price pressure is spreading from wholesale to retail — exactly what ICICI says MPC can't ignore as a "supply shock". That makes an October 25 bps hike likely — first since Feb 2023 — despite growth concerns.