Producer and headline inflation have been trending down, but some upside food inflation risk remains
India’s recent inflation figures suggest that the market is past the peak of consumer, and more so producer, prices. Corporate earnings reports also suggest that easing producer prices and robust domestic demand are already providing relief to the severe margin pressure experienced over the past year, enabling firms to turn their attention to profitability this year. Companies looking to implement further price increases in H2 2023 will likely face significant pushback from most customer segments. A recent FrontierView poll of APAC executives indicated that while some companies were still facing pressure to pass through price increases, an overwhelming majority (94%) were facing pushback from customers. Meanwhile, customer segmentation will continue to be the key to maximizing profitability, as companies are able to command higher prices for premium products oriented toward out-of-home entertainment (travel and retail) due to resilience in the higher-income consumer segment.
Overview
Headline consumer prices (including food and fuel) in India have gradually trended downward since the start of the year, falling from 6.5% YOY in January to 4.8% YOY as of the latest June print. Reduced prices for consumers have been driven primarily by lower prices for housing, fuel, and some sub-segments of food (e.g., vegetables, fruits, sugar, oil, and meat). However, upward pressure and upside risk to prices remain, driven by core inflation segments (e.g., clothing, footwear, and personal care) and select food categories (e.g., cereals, pulses, and spices). Concerned about this upside risk to inflation in a pre-election year, the Indian government banned the exports of a major rice type, dramatically raising global food inflation fears. The fall in consumer prices also comes at a time when producer prices have come down dramatically from the highs seen in mid-2022 into contractionary territory in Q2 2023.
Our View
The downward trend in India’s inflation is likely to continue playing out through the rest of 2023. Falling global commodity prices have enabled reduced domestic manufacturing costs, and continued cheap crude oil imports from Russia have resulted in low domestic fuel prices. Food prices—the primary source of upside inflation risk—will remain a risk through 2023 and likely for the long term, driven by irregular weather patterns. Core consumer inflation also remains high, at the central bank’s upper threshold of 6%, but firms should read this as a positive sign indicating strong domestic demand. FrontierView expects an average consumer price inflation level of 5.6% YOY in 2023 and 4.7% YOY in 2024.
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