What’s the main culprit behind Jan CPI increase? SBI explains

The January Consumer Price Index (CPI) inflation is estimated at 6.06% because of “unexpected statistical gaps and a lack of due diligence” across different data sources, SBI Research says in its latest report. India’s retail inflation, measured by the CPI, jumped to 6.52% in January 2023 from 5.72% in December 2022, breaching the Reserve Bank of India’s (RBI) upper tolerance limit of 6%.

The report says the main culprit of the CPI increase in January 2023 is "decade-high cereals inflation" of 16.12%. While cereals inflation is exhibiting an increasing trend for the past two years, the latest increase is “perplexing”, according to the research report.

Many reasons are being attributed to it. The research note says there is an “unexplained gap” of around 19 basis points in the 6.52% inflation number for January. “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%," says the note by Soumya Kanti Ghosh Group, Chief Economic Adviser, SBI Research.

Citing the reasons behind this analysis, the report says this is the first time the difference between the weighted contribution of cereals CPI and calculated cereals CPI (sum of item-wise) is so large (19 bps). “This is an unexplained behaviour exhibited first time in cereals inflation,” it adds.

It indicates CPI numbers earlier reported could have a downward bias, says the report. "These contrarian trends in CPI data by following a top-down and bottom-up approach is perplexing to say the least."

Secondly, since January 2023, the Centre merged the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) free food grains with Antodaya Anna Yojna (AAY) which 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 cereals inflation has made this jump feasible."

No linkage or data due diligence is found 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 has crashed by 10%, it shows a decline of 4% in CPI data. This anomaly is making it a nightmare to predict vegetable prices data."

Additionally, the core CPI also increased to 6.22% in January 2023 as compared to 6.10% in December 2022. "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." "All these reasons make us believe that RBI policy choices could get obfuscated, and the repo rate stays higher for longer," says the research note.