J.P Morgan Update Post Yesterday's CPI

The US bank sees some encouraging signs from underlying core inflation trends. However, with headline inflation likely to rise again in coming months (back towards 6%) on the back of spiking vegetable prices, the RBI is likely to remain cautious at the next policy meeting (December).

• J.P. Morgan: "The highlight of the report was that underlying inflation continues to remain contained with core-core monthly momentum coming in at 0.3% m/m, sa in October. Recall that core-core momentum has remained in the 0.2-0.3% range for the last five months. This has meant that, as we had expected, year-on-year core-core inflation softened to 4.5% oya -- lowest since March 2020.The October headline CPI softening was also helped by tomato prices disinflating. Unfortunately, however, vegetable prices have begun to reaccelerate in November with tomato prices sequentially increasing by ~25% and, more importantly, onion prices increasing by ~70% as per the Department of Consumer Affairs (DCA) daily price prints.
• Alongside this, other food prices like cereals and pulses -- likely impacted by patchy and uneven monsoon -- continued to firm up in October and November. Food prices (ex-vegetables) increased another 0.7% m/m, sa in October which on a year-on-year basis is now running at 6.8%. These dynamics along with the vegetable price surge in November is likely to push headline CPI towards 6% or above in November and December.
• For now, we still expect CPI ex vegetables to be close to 5% oya this quarter. But with headline CPI approaching 6% over the next two months, the RBI is likely to remain suitably cautious at the December review."