CPI inflation falls sharply to 4.31% in Jan-25 on food price effect

14 Feb 2025 , 09:41 AM

JANUARY 2025 HEADLINE INFLATION DEFIES BASE EFFECT

For the third month in a row, the tapering of consumer inflation continued in India. In October, CPI inflation had scaled a 14-month high of 6.21%. Since then, headline inflation has tapered to 5.48% in November, 5.22% in December, and now to 4.31% in January 2025. The January inflation is not only lower than the Bloomberg estimate of 4.60-4.70%; but is now just 31 bps short of the RBI long term inflation target of 4.0%.  More importantly, the lower inflation has come about by defying the base effect. Base year inflation between December 2023 and January 2024 was down from 5.69% to 5.10%. In this base period, food inflation had also fallen from 9.53% to 8.30%. Despite the lower base, Jan-25 inflation is decisively lower, showing that this is a genuine tapering of the inflation monster.

FOOD INFLATION FALLS; CORE INFLATION BOUNCES

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

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
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%	3.14%	5.08%
Jul-24	5.42%	3.39%	3.60%
Aug-24	5.66%	3.40%	3.65%
Sep-24	9.24%	3.49%	5.49%
Oct-24	10.87%	3.67%	6.21%
Nov-24	9.04%	3.64%	5.48%
Dec-24	8.39%	3.58%	5.22%
Jan-25	6.02%	3.70%	4.31%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key takeaways from the table above.

• As we mentioned earlier, the lower food inflation and headline inflation is despite a lower base, which underlines the trajectory of falling prices.
• Let us talk about food inflation for January 2025; which came in at 6.02%; which is 237 bps lower higher than the food inflation in December 2024. This is also sharply lower than the average food inflation of the last 12 months at 8.40%.
• After the core inflation fell to 3.58% in December 2024, it has bounced back to 3.70% in January 2025. This is due to the global uncertainty triggered by Trump tariffs. Average core inflation in last 12 months was 3.41%; so, January 2025 is significantly higher.
• What about headline inflation? Compared to the average of the previous 12 months at 4.95%, January 2025 headline inflation is meaningfully lower at 4.31%. The robust Rabi output has tempered food prices; and headline inflation is just 31 bps above RBI target.

Let us break up the non-food and the food inflation into rural and urban inflation to understand where the trigger for inflation shifts is coming from.

NON-FOOD INFLATION: URBAN STORY VERSUS RURAL STORY

Here is the macro picture of rural and urban inflation. Between December 2024 and January 2025, headline inflation moderated from 5.22% to 4.31%. During this period, headline rural inflation fell from 5.76% to 4.64%, while headline urban inflation also fell from 4.58% to 3.87%. What about food inflation? Between December 2024 and January 2025, the food inflation moderated from 8.39% to 6.02%. However, rural food inflation fell from 8.65% to 6.31%, while urban food inflation fell from 7.90% to 5.53%. Food inflation appears to have considerably moderated in January 2025; across rural and urban India.

Non-Food Basket	Non-Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Clothing	6.32	2.71	2.81	2.72
Footwear	1.04	1.84	2.44	2.08
Clothing and footwear	7.36	2.62	2.73	2.68
Housing	–	–	2.76	2.76
Fuel and light	7.94	-0.54	-2.90	-1.38
Household goods and services	3.75	2.41	3.35	2.86
Healthcare	6.83	3.93	4.05	3.97
Transport and communication	7.60	3.02	2.47	2.76
Recreation and amusement	1.37	2.48	2.79	2.64
Education	3.46	3.61	3.98	3.83
Personal care and effects	4.25	10.50	10.69	10.58
Miscellaneous	27.26	4.42	4.22	4.35

Data Source: MOSPI & Ministry of Finance Estimates

Where is rural India scoring on inflation and where is urban India scoring on the inflation story when it comes to non-food items? In this case of fuel & lighting inflation, it stands at a level of -0.54% in rural India, but at -2.90% in urban India. Transport and communication inflation is also higher in rural India at 3.02% compared to 2.47% in urban India. However, rural inflation has been lower in items like footwear, household goods, healthcare, education, and personal care & effects. It is in the fuel inflation basket, that urban India is scoring over rural India; while rural India scores on the core inflation basket.

FOOD BASKET: HOW RURAL AND URBAN INDIA STACKED UP?

Food basket with a weightage of 47.25% continues to be a swing factor for inflation; and January 2025 was no exception. Here, the food basket is broken into rural and urban inflation to assess the granular impact.

Food Basket	Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Cereals and products	12.35	6.56	5.56	6.24
Meat and fish	4.38	5.24	5.20	5.25
Egg	0.49	0.63	2.28	1.27
Milk and products	7.72	2.79	2.95	2.85
Oils and fats	4.21	17.25	12.71	15.64
Fruits	2.88	13.20	11.06	12.22
Vegetables	7.46	13.17	8.58	11.35
Pulses and products	2.95	2.62	2.55	2.59
Sugar and Confectionery	1.70	-0.08	1.07	0.31
Spices	3.11	-7.56	-5.35	-6.85
Non-alcoholic beverages	1.37	2.96	4.00	3.39
Prepared meals	5.56	3.44	4.83	4.07
Food Basket	47.25	6.31	5.53	6.02

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 January 2025 was lower at 6.24%. The rural cereals inflation at 6.56% was sharply higher than the urban cereals inflation at 5.56%.
• Let us turn to high protein inflation. Overall protein inflation has sobered in January 2025 for milk, eggs, and meat products. The fall in high protein inflation has been sharper in rural areas than in urban centres.
• What about the all-important vegetables and fruits? Vegetables inflation further moderated from 26.56% in December 2024 to 11.35% in January 2025. However, rural vegetables inflation is sharply higher. Fruits inflation spiked from 8.49% to 12.22%, with most of the pressure coming from rural India.

If the vegetables basket is ignored, overall inflation would be under 4.0%, but that would be more of wishful thinking.

WILL THE RBI NOW DELIVER THE SECOND RATE CUT?

In the February 2025 meeting of the RBI Monetary Policy Committee (MPC), the repo rates were cut by 25 bps to 6.25%. With inflation inching closer to 4% target, will the RBI be inclined to delivery another rate cut in April or in June 2025. While lower inflation looks to be sustainable, what the RBI may be really perturbed about is the free fall in the rupee. The spot dollar buying has not only depleted dollar reserves, but also dried up liquidity in the domestic rupee market. Despite all the effort, the rupee has weakened to ₹87/$.

It is a tough call for the RBI. Industry demands more rate cuts, but prudence may put limits on the RBI. April policy should be interesting!