December CPI inflation lower than expected at 5.22%

14 Jan 2025 , 02:55 PM

DECEMBER INFLATION MODERATES FURTHER ON BASE EFFECT

In October, the CPI inflation had scaled a 14-month high of 6.21%. Since then, the headline inflation has tapered to 5.48% in November and further to 5.22% in December 2024. In fact, the December inflation is lower than the Bloomberg estimate of 5.30%. However, the catch is that the lower inflation is largely on account of the base effect. Base year inflation between November 2023 and December 2023 was up from 5.55% to 5.69%. In this base period, food inflation had spiked from 8.70% to 9.53%. However, the fall in the base core inflation in the year ago period has led to current core inflation edging up to 3.80%. Probably, but for core inflation, the headline inflation could have been still lower!

FOOD INFLATION MODERATES; CORE INFLATION UP

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 (%)
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%	3.14%	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%	3.80%	5.22%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key takeaways from the table above.

• As we mentioned earlier, the increase in the base period food inflation and the fall in the base period core inflation tended to offset each other, and hence the overall impact on headline inflation was limited compared to the previous month.
• Let us talk about food inflation first. For December 2024, food inflation came in at 8.39%; which is 65 lower higher than the food inflation in November 2024; falling 248 bps in the last 2 months. If you compare with the average food inflation of the last 12 months at 8.50%, the November 2024 food inflation is marginally lower.
• In December 2024, core inflation is estimated to have increased to 3.80% due to the lower base effect. With supply disruption edge going away and concerns in the Red Sea, core inflation has been under pressure. Average core inflation in last 12 months stood at 3.43%; so, December 2024 is substantially higher.
• Finally, let us turn to headline inflation. Compared to the average of the previous 12 months at 4.99%, December 2024 headline inflation is still higher at 5.22%. Hopefully, the arrival of Kharif at mandis and the reports of Rabi output should help temper food prices. However, headline inflation remains a full 122 bps above the RBI 4% 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 November 2024 and December 2024, the headline inflation moderated from 5.48% to 5.22%. During this period, headline rural inflation fell from 5.95% to 5.76%, while headline urban inflation also fell from 4.89% to 4.58%. What about the break-up of food inflation? Between November 2024 and December 2024, the food inflation moderated from 9.04% to 8.39%. However, rural food inflation fell from 9.10% to 8.65%, while urban food inflation also fell from 8.74% to 7.90%. Food inflation appears to have considerably moderate in December.

Non-Food Basket	Non-Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Clothing	6.32	2.82	2.81	2.78
Footwear	1.04	1.73	2.57	2.03
Clothing and footwear	7.36	2.73	2.79	2.74
Housing	–	–	2.71	2.71
Fuel and light	7.94	-0.49	-2.91	-1.39
Household goods and services	3.75	2.41	3.24	2.75
Healthcare	6.83	4.00	4.12	4.05
Transport and communication	7.60	2.85	2.41	2.64
Recreation and amusement	1.37	2.54	2.79	2.70
Education	3.46	3.72	4.04	3.89
Personal care and effects	4.25	9.62	9.82	9.70
Miscellaneous	27.26	4.26	4.12	4.19

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? 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 -1.39%, the urban inflation stands at -2.91% while rural inflation is -0.49%. Even the transport and communication inflation is higher in rural areas at 2.85% compared to 2.41% in urban India. However, rural inflation has been lower in items like footwear, household goods, healthcare, education, and personal care & effects. Rural India is scoring much better on the core inflation basket, while urban India scores on the fuel basket.

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 December 2024 was no exception. The food basket is also 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	6.82	5.87	6.51
Meat and fish	4.38	5.38	5.15	5.30
Egg	0.49	6.44	7.42	6.85
Milk and products	7.72	2.69	2.96	2.80
Oils and fats	4.21	16.38	11.36	14.60
Fruits	2.88	9.39	7.49	8.49
Vegetables	7.46	28.66	23.36	26.56
Pulses and products	2.95	4.02	3.47	3.83
Sugar and Confectionery	1.70	-0.08	0.99	0.31
Spices	3.11	-8.03	-6.12	-7.41
Non-alcoholic beverages	1.37	2.64	3.72	3.06
Prepared meals	5.56	3.50	4.59	3.99
Food Basket	47.25	8.65	7.90	8.39

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 December2024 was lower at 6.51%. The rural cereals inflation at 6.82% was sharply higher than the urban cereals inflation at 5.87% in December 2024.
• Let us turn to high protein inflation. Overall protein inflation has sobered in December 2024 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? After reporting 35.99% in September, 42.18% in October and 29.33% in November; vegetables inflation moderated to 26.56% in December 2024. Fruits inflation spiked to 8.49%.

If the vegetables basket is ignored, overall inflation would be around 3.8%, which is well within the RBI mandate. However, that also has systemic issues.

CAN THE RBI DELAY RATE CUTS FURTHER?

If there is one thing that, perhaps, stands between the RBI and rate cuts, it is the sharp fall in the rupee. The Indian rupee does not have the exorbitant privilege like the US dollar, so rate cuts would mean more FPI outflows and further pressure on the rupee. With the USDINR already well beyond ₹86.70/$, there is limited leeway for the RBI. While the growth concerns are there, the combination of a vulnerable rupee and above average inflation may rule out rate cuts in February 2025. That is; unless the RBI is willing to make a brave wager!