Hurricane Phailin serves up a CPI storm

fe Bureau Posted online: Saturday, Dec 14, 2013 at 0000 hrs
New Delhi : Many analysts are convinced the central bank needs to hike repo rates on Wednesday given how the consumer price index is rising inexorably, from 9.8% in September to 10.2% in October and 11.2% in November. But it isn’t stagflation – stagnating GDP and rising inflation – that we’re necessarily taking about, though the explanation could kick up more than a mini storm.

Needless to say, the explanation involves the excessive food and vegetable inflation – remove the amazing 61% hike in vegetable prices in November, and CPI in the month comes down to more manageable 8.2%, indeed vegetable prices have already started falling and will fall more over the next couple of months.

But how do you explain this 61% hike in vegetable prices since the crop has been coming in for several weeks now? Indeed, most economists were penciling in a fall in vegetable prices. And has the hike been uniform across the country.

Standard Chartered Bank’s Samiran Chakraborty, who is the south Asia head of Global Research, lives in Mumbai and, since he shops regularly, was taken aback since this is not what he saw at the local vegetable vendor. So he did a bit of a deep dive into the data. Here’s what he found:

*States that fell in the path of Hurricane Phailin had a higher November inflation. Though Phailin hit India in mid-October, the damage to crops like potatoes and rice probably got reflected with a lag effect.

*Phailin states like Odisha, see table, saw a 3.8% hike in CPI month-on-month and Bihar 2.8% as compared to the national average of 1.4%.

States affected by Phailin/ M-o-M change in CPI

Bihar - 2.8%

Jharkhand - 2.4%

Odisha - 3.8%

West Bengal- 2.3%

Andhra Pradesh-1.2%

National average-1.4%

*The non-Phailin states, by contrast, showed a much lower CPI print. While Maharashtra and Madhya Pradesh saw just a 0.5% month-on-month hike in CPI, the number was 0.6% for Tamil Nadu, 0.9% for Kerala and 1% for Punjab versus the national average of 1.4%.

States affected by Phailin/ M-o-M change in CPI

Maharashtra-0.5%

Madhya Pradesh-0.5%

Tamil Nadu- 0.6%

Gujarat-0.5%

Kerala-0.9%

National average-1.4%

Apart from worrying about whether he wants to be reacting to news that is already old – since CPI is going to be falling soon – RBI Governor Raghuram Rajan needs to decide whether he is going to react to local price jumps or whether he is going to look at the larger national picture. Watch this space.