December 2023 CPI inflation rises to 5.69%, as food inflation spikes

16 Jan 2024 , 09:20 AM

December 2023 inflation 14 bps higher at 5.69%

Like in November, inflation had its share of good news and not so good news. For starters, inflation rose for the second month in a row to 5.69%. What would perturb the RBI is that consumer inflation is now 169 bps above the avowed target of 4%. However, the inflation was not all that bad compared to the street estimates. The street was expecting CPI inflation to come in at around 5.87%, so in comparison 5.69% look relatively better. Also, compared to the recent peak of 7.44% in July 2023, December inflation is still substantially lower. But that is not to detract from the point that the inflation is now getting closer to the RBI outer tolerance limit of 6%; a level the markets would not like inflation to breach.

The inflation number has had a relatively bumpy ride of late. It has fallen for three months since the peak and then bounced for two months in a row. From 7.44% in July 2023, the inflation had progressively fallen to 6.83% in August 2023, 5.02% in September 2023, and further to 4.87% in October 2023. Since then, inflation bounced to 5.55% in November 2023 and further to 5.69% in December 2023. However, inflation remains under the RBI outer tolerance limit of 6% for four months in a row; but markets would like inflation to be less volatile. There are some positives in the components of inflation. Structural inflation continues to trend lower, but it is food (and fuel) that is driving inflation higher in India. 

December Inflation: Blame it on Food as core inflation slackens

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 inflation. The table captures time series data of headline inflation, core inflation and food inflation over the last 13 months.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Dec-22	4.19%	6.10%	5.72%
Jan-23	5.94%	6.10%	6.52%
Feb-23	5.95%	6.10%	6.44%
Mar-23	4.79%	5.95%	5.66%
Apr-23	3.84%	5.20%	4.70%
May-23	2.91%	5.02%	4.25%
Jun-23	4.49%	5.10%	4.81%
Jul-23	11.51%	4.90%	7.44%
Aug-23	9.94%	4.80%	6.83%
Sep-23	6.56%	4.50%	5.02%
Oct-23	6.61%	4.20%	4.87%
Nov-23	8.70%	4.10%	5.55%
Dec-23	9.53%	3.89%	5.69%

Data Source: MOSPI & Ministry of Finance Estimates

If you look at the table above, it is the 83 bps spike in food inflation from 8.70% to 9.53% that has been responsible for the spike in headline inflation. Otherwise, core inflation is lower in December; and at 3.9%, the core inflation stands at a 30-month low. It must be noted here that much of the food inflation pressure in November has come from urban India as compared to rural India. However, if you look at the non-food inflation, it is much higher in rural India. That explains why, despite lower food inflation, the overall headline inflation is higher in rural India as compared to urban India. While higher urban food inflation is a function of supply chain and infrastructure constraints, the higher non-food inflation in rural India is due to demand recovery, in line with higher incomes.

Food inflation has averaged 8.81% in the last 6 months since food inflation touched double digits for the only time this year in July 2023. Why does the average food inflation at 8.81% in the second half of 2023 contrast with 4.65% in the first half of 2023? The reason is the weaker than expected Kharif output in 2023 due to erratic rainfall and a delay in the Rabi sowing season due to delayed monsoons in certain places. In fact, the drought conditions in the early part of monsoons were followed by flood situations in some parts of the country. The net result was felt not only on the Kharif output, but also on the logistics of bringing foodgrains to the Mandis as well as delayed Rabi sowing. The Rabi sowing was also hit by lower water levels in reservoirs. Food inflation in H22023, reflects this double whammy. 

Rural and urban inflation – the macro picture

Inflation has risen in December across urban and rural centres, across food and non-food items. However, the extent of spike in food inflation and overall inflation is lower than the previous month. In December 2023, headline inflation rose from 5.55% to 5.69%, but the core inflation trended lower from 4.10% to 3.90%. Let us look at how the rural and urban inflation numbers compare. Headline inflation has risen from 5.55% to 5.69% between November 2023 and December 2023. In this same period, urban inflation has risen from 5.26% to 5.46% while rural inflation increased from 5.85% to 5.93%. In the same period, all-India food inflation has risen from 8.70% to 9.53%. In this period, the rural food inflation has grown from 8.38% to 8.97% while urban food inflation spiked sharply from 9.33% to 10.42%. In short, pressure is coming from the urban food basket and rural non-food basket.

Deciphering the food basket for December 2023

Food basket with a weightage of 54.2% has been the swing factor for inflation in the second half of 2023. The food basket, in the table below is broken up into rural and urban inflation and the price impact is captured for all the key items in the food basket.

Food  Products	Rural Inflation  in (%)	Urban Inflation  in (%)	Headline Inflation  in (%)
Cereals and products	10.31	9.05	9.93
Meat and fish	0.58	2.16	1.15
Egg	4.23	4.64	4.36
Milk and products	5.13	4.95	5.07
Oils and fats	-16.25	-12.51	-14.96
Fruits	10.21	12.16	11.14
Vegetables	25.43	31.34	27.64
Pulses and products	19.77	22.65	20.73
Sugar and Confectionery	7.34	6.74	7.14
Spices	20.05	19.05	19.69
Non-alcoholic beverages	2.94	3.93	3.33
Prepared meals, snacks.	3.52	4.71	4.10
Consumer Food Inflation	8.97	10.43	9.53

Data Source: MOSPI & Ministry of Finance Estimates

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

• Let us start with cereals inflation. The overall cereals inflation for December 2023 was slightly lower at 9.93%. However, rural cereals inflation at 10.31% was much higher than urban cereals inflation at 9.05%. 

   

• Let us turn to protein inflation comprising of milk and eggs. While the inflation in the high protein products has come down over November, the break-up is mixed. While urban egg inflation is higher, urban milk inflation is lower than rural segments.

   

• What about the all-important vegetables and fruits? Urban inflation in vegetables and fruits continues to be sharply higher than rural inflation. However, vegetables inflation overall spiked in December over November; being a key swing factor for food inflation.

   

• What about pulses inflation? The overall pulses inflation for December 2023 was slightly higher at 20.73%. However, rural pulses inflation at 19.77% was sharply lower than urban pulses inflation at 22.65%.

   

• Finally, if you look at spices, then the overall spices inflation for December 2023 is lower at 19.69%. However, rural spices inflation at 20.05% continues to be higher than urban spices inflation at 19.05%.

Among non-food items, inflation in fuel & lighting and in transportation continue to be low on a yoy basis due to the base effect. However, fuel inflation is still expanding in rural areas while it is contracting in urban centres. Transport inflation is also higher in the rural areas compared to the urban centres. However, when it comes to health and personal care products, rural India is facing lower levels of inflation.

Why lower core inflation is a cause for celebration

In the last one year, core inflation has come down from a relatively intransigent level of 6.1% to the current level of 3.89%. Core inflation has for long been a major concern for the policymakers. But, what exactly is core inflation? It is the residual inflation left in the inflation basket after removing food and fuel. In short, all the other products like clothing, footwear, housing, medical expenses, entertainment etc would be classified as the core products basket. There is a reason why core inflation is given so much weightage.

Core inflation tends to be structural in nature and hence tweaking demand and supply normally does not help. This is in contrast to food and fuel, which can be managed through well-directed policies. Core inflation continues to be as important as headline inflation from a policy perspective. After years of the core inflation being above the 5% mark, it has dipped below 4% for the first time in 30 months. Much of the core inflation in the last few years was due to the supply chain constraints in the aftermath of the COVID pandemic, when the supply failed to keep up with the surge in demand. That appears to tapering now.

States that diverged from national average inflation

The national headline inflation stood at 5.69%, but some states were substantially above the national average and some were well below the national inflation average.

• On the upside, Odisha at 8.73%, Gujarat at 7.07%, Rajasthan at 6.95%, Haryana at 6.72%, Telangana at 6.65%, and Maharashtra at 6.08% were some of the stand-out cases of inflation being much higher than the national average.

   

• On the downside, Jammu & Kashmir at 4.15%, Kerala at 4.28%, Chhattisgarh at 4.49%, Uttarakhand at 4.73%, Tamil Nadu at 4.97% and West Bengal at 4.98% were some of the states that reported headline inflation much lower than the national average.

Clearly, it seems to be a case of the more industrialized states facing higher inflation, although one can say that Tamil Nadu appears to be an exception to that axiom.

Can higher inflation trigger rate hikes by the RBI?

The December RBI policy marked the fifth consecutive policy in 2023 when the repo rates was held static at the level of 6.5%. The RBI had maintained its rate stance, even when consumer inflation had spiked to 7.44% in July this year. At that time, RBI had taken a call that the spike in inflation was temporary and hence rate action was not needed. In retrospect, that was a brave decision, but it seems to have worked fine for the Indian economy. Despite the recent spike, inflation is not such a pressing concern to justify hiking rates. However, there are 2 factors that must be taken in to account.

1. As long as food inflation and core inflation are in control, RBI would not be too inclined to hike rates from current levels. Instead, it may choose to err on the side of caution and just hold rates at elevated levels. It must be noted that some tightening has already happened through the back door when the RBI tightened screws on consumer lending. RBI had done that by hiking risk weights for consumer loans by banks and NBFCs.

    

2. If you read the minutes of the last few RBI MPC meetings, it has not closed its doors to hiking rates. However, RBI may hike rates only in a worst-case scenario if global geopolitical risk and imported inflation go out of control. For now, the Red Sea crisis is only hurting exports, but the impact on import prices is yet to be felt. If that happens, then the RBI may have reasons to evaluate the possibility of a rate hike. With the recent IIP reading at 2.40%, RBI would not want any disruption to the growth story.

The best that the RBI will do now is a pause for longer than expected. The RBI may not be in a hurry to hike rates, but will ensure rates are held at elevated levels for longer time to avoid persistent inflation creeping back. RBI also realizes that the repo rates are a full 135 bps above the pre-COVID rates, which is substantially hawkish, per se. However, the RBI would want to keep its hawkish options open and play its cards close to its chest. Even as markets are demanding a rate cut, that looks fairly remote in the first half of 2024. We may have to wait for the 2024 Kharif season, before the RBI moves on lowering rates.