August CPI inflation slightly up at 3.65%

13 Sep 2024 , 12:57 PM

AUGUST 2024 INFLATION AT 3.65% – WELL IN COMFORT ZONE

The previous month of July 2024 had surprised the street with a 5-year low inflation of 3.54%. That has been revised marginally upward to 3.60%, which is just 6 bps. The expectation was that, with the base effect waning, the CPI inflation would move above 4% in August and much higher in September. However, the MOSPI did surprise the street with consumer inflation at 3.65% for August 2024. This is the second month in a row that the headline inflation has been under the RBI long term target of 4%. It may be recollected that the RBI has set 4.5% as the inflation estimate for FY25. Even assuming that inflation does edge up from here, we could see the final FY25 inflation under-shooting the RBI target. That would be a good problem to have. While the base effect did play a part, it must be noted that the August 2023 base is about 61 basis point slower sequentially. Despite the base factor, the headline inflation in August 2024 has just inched up by 5 bps to 3.65%.

In India, no discussion on consumer inflation is complete without dwelling on food inflation, since it encompasses about 47.5% of the overall consumer inflation basket. Let us look at how the food inflation panned out with reference to the base month details. For the month of August 2024, the food inflation went up from 5.42% to 5.66%. However, that is not too worrisome if you consider the fact that the base had seen food inflation move down 157 bps to 9.94%. Let us first look at how headline inflation moved in the year-ago period. Between June 2023 and July 2023, the headline inflation moved down from 7.44% to 6.83% and that partially contributed to higher food inflation in India. One trend we have seen in recent months is the hardening of core inflation as the lockdown impact gradually wanes.

HOW TO READ CPI INFLATION WITH WPI INFLATION

The best way to read consumer inflation is in conjunction with wholesale inflation or producer inflation, which is normally announced a day or two after the consumer inflation. There are two basic differences and that is what makes their combination important from an analytical perspective. The CPI inflation gives the highest weightage to food inflation while WPI inflation gives the highest weightage to manufacturing inflation. The WPI inflation is a much better reflection of the inflation that manufacturers are experiencing while CPI inflation is a better reflection of the inflation that household consumers are facing. Over a longer time frame, the CPI and WPI inflation also sync with each other. The CPI inflation normally acts as the lag effect while WPI inflation is the lead indicator. However, wide variations between CPI and WPI inflation are quite common in the Indian context.

AUGUST FOOD INFLATION SUBDUED; CORE INFLATION BOTTOMS OUT

The headline inflation is broadly divided into food inflation, fuel inflation and core inflation. Core inflation is the residual inflation net of food and fuel. The table has 13 months data.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Jul-23	11.51%	4.94%	7.44%
Aug-23	9.94%	4.79%	6.83%
Sep-23	6.56%	4.52%	5.02%
Oct-23	6.61%	4.26%	4.87%
Nov-23	8.70%	4.11%	5.55%
Dec-23	9.53%	3.89%	5.69%
Jan-24	8.30%	3.59%	5.10%
Feb-24	8.66%	3.37%	5.09%
Mar-24	8.52%	3.24%	4.85%
Apr-24	8.70%	3.23%	4.83%
May-24	8.69%	3.12%	4.80%
Jun-24	9.36%	3.12%	5.08%
Jul-24	5.42%	3.30%	3.60%
Aug-24	5.66%	3.40%	3.65%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key takeaways from the table above.

• Before we start off on inflation basket, a quick word on the base effect. The CPI inflation is yoy inflation so it is vulnerable to the base effect. Between July 2023 and August 2023, the headline inflation had fallen from 7.44% to 6.83%, while the food inflation had also fallen sharply from 11.51% to 9.94%. The marginal spike in the food inflation and the headline inflation can be attributed to this base effect.
• Let us talk about food inflation first. For August 2024, food inflation came in at 5.66%; which is 24 bps higher than the food inflation in July 2024. If you compare with the average food inflation of the last 12 months at 8.25%, the August 2024 inflation is 259 bps lower. The spike in food inflation was across categories.
• We will not spend too much time on energy inflation due to its regulated nature, but suffice to say that it went deeper into the negative during the month of August 2024 on the back of a sharp fall in crude prices. In July 2024, core inflation was up from 3.12% to 3.30%; and for August 2024, it is further up to 3.40% as per early estimates. That can be attributed to the higher implicit costs of trade disruptions and post-COVID supply disruptions normalizing. This is the trend in the US also, where core inflation appears to have bottomed out and started inching higher.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.43%, the August 2024 headline inflation is sharply lower at 3.65%. However, the one big swing factor for CPI inflation in India has been the food prices and that could hold the key to inflation. For the RBI, the good news is that the CPI inflation in India has spent two months under the 4% target, something even the US has struggled to achieve.

One of the concerns has been that rural India is bearing the brunt of higher inflation in India. Is that actually the case? For now, the data appears to corroborate that view.

NON-FOOD INFLATION: HOW URBAN AND RURAL BASKETS STACKED UP

Let us first look at the macro picture of rural and urban inflation. For August 2024, the headline inflation was higher at 3.65%, compared to 3.60% (revised) in July 2024, while food inflation was also higher by 24 basis points at 5.66%. How do rural and urban India resonate, and is there an inflation divide. Let us start with headline inflation; marginally higher by 5 bps at 3.65% for August 2024. How does the break-up look? Between July and August 2024, urban inflation edged up by 11 bps from 3.03% to 3.14%. During the same period, rural inflation also edged up by 6 bps from 4.10% to 4.16%. The impact is roughly equal in both the rural and urban inflation on a sequential basis.

Let us turn to food inflation movement in rural and urban India between July and August 2024. During this period, urban food inflation increased by 36 bps from 4.63% to 4.99%. In the same period, rural food inflation also edged up by 13 bps from 5.89% to 6.02%. For the month of August , both rural and urban inflation are slightly higher. However, this could be largely attributed to the base effect and we would get a clearer picture only when the base effect is eliminated. Let us first look at the non-food basket for August 2024 with a break-up of rural and urban non-food inflation.

Non-Food Basket	Non-Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Clothing	6.32	2.64	2.90	2.75
Footwear	1.04	1.69	2.59	2.04
Clothing and footwear	7.36	2.55	2.88	2.72
Housing	–	–	2.66	2.66
Fuel and light	7.94	-2.74	-9.39	-5.31
Household goods and services	3.75	1.99	2.98	2.43
Health	6.83	3.95	4.29	4.10
Transport and communication	7.60	2.86	2.54	2.71
Recreation and amusement	1.37	2.28	2.34	2.31
Education	3.46	3.90	3.56	3.74
Personal care and effects	4.25	7.74	8.19	7.94
Miscellaneous	27.26	3.92	3.81	3.89

Data Source: MOSPI & Ministry of Finance Estimates

Where is rural India scoring on inflation and where is urban India scoring on the inflation story? One of the major items where there is a huge gap is fuel and lighting. In this case, while the overall fuel & light inflation is at -5.31%, the urban inflation stands at -9.39% while rural inflation is -2.74%. Even the transport and communication inflation is higher in rural areas at 2.86% compared to 2.54% in urban India. However, rural inflation has been lower in items like clothing, footwear, household goods, healthcare, and personal care products. The pressure from fuel, lighting, transport, and communication is still causing rural stress.

FOOD BASKET: HOW RURAL AND URBAN INDIA STACKED UP?

Food basket with a weightage of 47.25% continues to be the swing factor for inflation since mid-2023; and August 2024 was no different. The food basket is broken into rural and urban inflation to capture the granular impact.

Food Basket	Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Cereals and products	12.35	7.60	6.73	7.31
Meat and fish	4.38	4.26	4.28	4.30
Egg	0.49	7.98	5.89	7.14
Milk and products	7.72	2.81	3.31	2.98
Oils and fats	4.21	-0.73	-1.19	-0.86
Fruits	2.88	6.83	6.02	6.45
Vegetables	7.46	13.22	6.87	10.71
Pulses and products	2.95	13.15	14.36	13.60
Sugar and Confectionery	1.70	4.73	4.49	4.70
Spices	3.11	-5.20	-2.81	-4.40
Non-alcoholic beverages	1.37	1.94	3.04	2.40
Prepared meals	5.56	2.90	4.15	3.47
Food Basket	47.25	6.02	4.99	5.66

Data Source: MOSPI & Ministry of Finance Estimates

Here are the key items in the inflation basket across rural and urban segments.

• Let us start with cereals inflation. The overall cereals inflation for August 2024 was about 83 bps lower at 7.31%. The rural cereals inflation at 7.60% was higher than the urban cereals inflation at 6.73% for August 2024; largely on account of lower cereals output last season. However, with good monsoons this year, cereals inflation is tapering.
• Let us turn to high protein inflation. Overall protein inflation has sobered in August 2024 for milk and eggs; continuing the trend of June 2024. Even meat products inflation is lower for August 2024. The fall in high protein inflation has been much sharper in rural areas, which is a good sign.
• What about the all-important vegetables and fruits? After falling sharply to 6.83% in July 2024, the vegetable inflation is higher at 10.71%. However, while rural vegetables inflation stays elevated at 13.22%, urban vegetables inflation was sober at just 6.87%.
• What about pulses inflation? The overall pulses inflation for August 2024 was still elevated at 13.6%, but was a full 117 bps lower than the previous month. In terms of actionable items, the rural pulses inflation at 13.25% is lower than the urban pulses inflation at 14.36%.
• Finally, if you look at spices, then the overall spices inflation for August 2024 has dipped into negative at -4.40%. This compares favourably with 2.06% in June, 4.27% in May, 7.50% in April, and 11.40% in March 2024. Rural spices inflation is sharply lower than urban spices inflation.

August was the second month in a row wherein the headline inflation stayed under the RBI target of 4%. August also saw hardening of food inflation across the food and core baskets, although the energy basket edged lower amidst falling crude prices.

HOW STATE-WISE INFLATION DIVERGED IN AUGUST 2024

While the national average CPI inflation was 3.65% in August, the rural inflation is much higher at 4.16%, compared to just 3.14% for urban India. Here is the state-wise inflation.

• On the upside, Bihar at 6.62%, Odisha at 5.63%, Assam at 5.03%, Uttar Pradesh at 4.89%, Haryana at 4.12%, and Kerala at 4.10% were some of the stand-out cases of higher than national-average inflation.
• On the downside, Telangana at 2.02%, Uttarakhand at 2.37%, Delhi at 2.52%, Himachal Pradesh at 2.66%, and Jharkhand at 2.86% were some of the states that reported headline inflation much lower than the national average.
• In terms of rural in Bihar, Odisha, Uttar Pradesh, Assam, and Chhattisgarh reported highest rural inflation, while Telangana, Uttarakhand, Delhi, Maharashtra, and Jharkhand reported lowest rural inflation. In the case of urban inflation; Bihar, Assam, Kerala, Odisha, and Maharashtra were at the top while Himachal Pradesh, J&K, Telangana, Madhya Pradesh, and Punjab were at the bottom of the list.

Out of the 22 states, only 3 states reported above 5% inflation, and 6 states above 4% inflation, which can be attributed to the high base effect.

WILL THE RBI GET ENOUGH CONFIDENCE TO CUT RATES IN OCTOBER?

The RBI had opted to hold status quo on rates in August policy; but could do a rethink in October. Here is why.

• Headline inflation has now been under the RBI target of 4% for 2 months in a row. More importantly, for FY25, the Indian economy looks all set to undershoot the RBI target of 4.5% inflation for the full fiscal year. That is favourable for rate cuts.
• The Fed looks set to cut rates by 25 bps on September 18, 2024; but it could well be 50 bps as there are growing concerns about growth. Under these circumstance, the RBI would not want to remain hawkish or even neutral and risk monetary divergence.
• The first quarter GDP for FY25 came in sharply lower at 6.7% in real terms. Ironically, the nominal GDP growth was higher by 120 bps on a yoy basis. Clearly, inflation is playing spoilsport. That means, the government needs to keep its focus on nominal growth and that is only possible with sustained cuts in interest rates.
• India is in a monetary sweet spot. The repo rates at 6.50% are 135 bps above the pre-COVID rates of 5.15%. In addition, the real rates of interest in India are still too high at 2% and lower costs will be a boon for corporates in reducing their cost of funds.

A mix of local and global factors is likely to make rate cuts a lot more likely, and even inevitable when the RBI meets next in October 2024. However, a lot will predicate on how the Fed interprets the macro data and acts on rates.