EUR 125.00 For Business Accounts Only

MOSL: ECOSCOPE-CPI inflation way above expectation in Dec’19; Forget about rate cuts

ECOSCOPE: CPI inflation way above expectation in Dec’19

** CPI-based retail inflation shot up to a 67-month high of 7.4% in Dec'19 from 5.5% a month ago. The number was way higher than our estimate of 6.5% and consensus of 6.7%. With this, CPI inflation stands at 5.8% for 3QFY20 - the highest in 21 quarters.

** Food inflation accelerated to over six-year high of 14.1% in Dec'19 (our estimate: 12.4%) from 10.0% in the previous month, driven primarily by 'vegetables.' All other food items too exhibited higher inflation in the month. Vegetables inflation rose to a 73-month high of 60.5% in Dec'19 v/s 36.1% a month ago (our estimate: 55%). In fact, CPI inflation excluding vegetables was at 4.1% in Dec'19 - the highest in 14 months.

** Core inflation (inflation in 'housing, 'clothing and footwear' and 'miscellaneous' combined) also accelerated to 3.7% in Dec'19 from 3.5% a month ago. This can be attributed to higher inflation in 'clothing and footwear' and 'miscellaneous' items as 'housing' inflation slowed in the month.

** Inflation in 'core services', which had been consistently trending down in the last 11 months, also changed direction in Dec'19. It came in at 4.0% v/s 3.5% a month ago, primarily led by higher inflation in 'transport and communication', 'recreation' and 'personal care' services.

** Multi-month-high CPI inflation excluding vegetables is worrisome. Even if we assume a decline of 5% MoM in vegetable prices in the next two months, headline inflation will remain at ~7%. Therefore, likely headline inflation of ~5% throughout CY20 is more concerning - it would then confirm that rate cuts are a thing of the past. In addition, although it is still an exaggeration to assume India is in stagflation as growth is still more than 4%, discussion over rate hikes might gather steam. Considering it in the backdrop of lower savings, the case for rate hikes strengthens even more.