February 2023 CPI inflation at 6.44%, but core inflation sticky

14 Mar 2023 , 09:22 AM

On a sequential basis, CPI inflation tapered by 8 bps to 6.44% in February 2023, but this is after there was a huge 80 bps jump in inflation in January from 5.72% to 6.52%. For February 2023, Reuters consensus estimate had pegged consumer headline inflation at 6.35%, so the actual headline inflation was about 9 bps higher. 

Inflation back above the RBI permissible outer limit

If you look at the components of inflation, food inflation and core inflation are almost at the same levels as January 2023, and the fall is largely due to lower fuel inflation. However, core inflation staying around 6.1% is a rather intimidating idea for policymakers. Between September 2022 and December 2022, the CPI inflation fell 169 bps from 7.41% to 5.72%. However, in last two months, inflation is back outside the RBI outer permissible limit of 6%.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Feb-22	5.85%	5.99%	6.07%
Mar-22	7.68%	6.32%	6.95%
Apr-22	8.38%	6.97%	7.79%
May-22	7.97%	6.08%	7.04%
Jun-22	7.75%	5.96%	7.01%
Jul-22	6.75%	6.01%	6.71%
Aug-22	7.62%	5.90%	7.00%
Sep-22	8.60%	6.10%	7.41%
Oct-22	7.01%	5.90%	6.77%
Nov-22	4.67%	6.00%	5.88%
Dec-22	4.19%	6.10%	5.72%
Jan-23	5.94%	6.10%	6.52%
Feb-23	5.95%	6.10%	6.44%

Data Source: MOSPI & Ministry of Finance Estimates

If you compare February 2023 CPI inflation with the peak inflation of 7.79% in April 2022, it is just about 135 basis points lower. This is in contrast to the 1100 basis points fall in the wholesale price index (WPI Inflation) from the peak. However, the fact does remain that WPI inflation is more sensitive to monetary tightening and the WPI inflation is, often, a lead indicator or precursor to CPI inflation. In January 2023, food inflation had from 4.19% to 5.94%, but in February 2023, the food inflation is stable at the same levels. 

If one looks at the food basket in February 2023, the pressure is on cereals, spices, and high protein products, even as vegetable inflation continues to be negative. For instance, spices inflation stands at 20.20%, cereals inflation at 16.73% and milk products at 9.65%. Vegetables inflation saw -11.61% contraction, but that could be more due to farmers selling their produce at throwaway prices to exhaust their stocks; which is not a good sign.

February 2023 was about the return of urban inflation

In the last few months, it was rural inflation that had hit prices hard. This time around, urban inflation has also risen sharply. Let us look at the macro picture first. Between January 2023 and February 2023; overall inflation tapered from 6.52% to 6.44%. During the same period, rural inflation fell from 6.85% to 6.72% while urban inflation increased from 6.00% to 6.10%. Even if you look at food inflation, rural food inflation tapered from 6.65% to 6.60% over last month while urban food inflation increased from 4.85% to 5.09%. There are concerns that demand factors may have led to low demand and consequently lower inflation in rural India, but we need more data points to come that conclusion.

In terms of specific items in the inflation basket, cereals inflation is still much higher in rural India at 17.81% compared to 14.62% in urban India. However, rural India is seeing lower inflation in high protein items like eggs and milk.  The contraction in vegetable inflation is much sharper in urban India at -13.08% compared to -10.63% in rural India. The other major inflation item, spices, has seen sharply higher inflation in rural India. On the other items in the basket, some of the core inflation items are lower in the rural areas and that has helped rural inflation staying in check in February 2023.

Core inflation steady and sticky at 6.1%

Core inflation (inflation excluding food and fuel), which had fallen to 5.9% in October 2022, bounced to 6.1% in December 2022 and has steadied there. The problem is that 6.1% core inflation represents a structural issue. As long as core inflation remains elevated, it is tough to bring down headline inflation. Unlike food and fuel inflation, core inflation tends to be sticky, rather than cyclical. In the Economic Survey ahead of Union Budget 2022, the finance minister had underlined the need to bring down core inflation to manageable levels. 

The target here is to keep core inflation around 4%. However, core inflation has stayed above 6% for 9 out of the last 13 months, while headline inflation has been above 6% for 11 out of the last 13 months. This is unlike the situation in the US where the fall in core inflation has accompanied the fall in overall inflation. High core inflation is also a signal of persistent supply chain constraints.

A quick look at the CPI food basket in February 2023

Here are some major highlights of the food story in February 2023.

• Let us first look at the high protein and high vitamin intake. Meat and fish inflation has fallen sharply to 3.39% in February 2023 from 6.04% in January and 5.13% in December. Inflation in eggs fell to 4.32% in February 2023 from 8.78% January and 6.91% in December. Oils and fats dipped into negative at -0.49% in February against positive inflation in the previous two months. However, inflation in milk edged higher to 9.65%.

   

• Fruits inflation bounced back sharply to 6.38% in February 2023 from just 2.93% in January 2023. Vegetables inflation is still negative at -11.61%; almost at par with January 2023, which was -11.70%. Among others, pulses inflation was at 4.09% compared to 3.89% and 4.27% in the previous two months.. The real challenge was cereals inflation in the food basket which has risen from 13.79% in December 2022 to 16.73%. 

Inflation pressure is clearly quite high in index-heavy items like cereals and milk products and that has put sustained pressure on headline inflation. 

25 bps rate hike looks likely in April 2023

Even as the markets are closely watching the Fed meeting next week, the choice for the Fed is between 25 bps and 50 bps. It remains to be seen whether the SVB crisis really clouds the hawkish approach of the Fed. Otherwise, the RBI looks all poised to hike rates by another 25 bps in April to 6.75%, clearly hinting at terminal rates well above 7%. The latest IIP figure shows that manufacturing is robust, although the cost of funds is starting to pinch.

1. In February 2023, the MPC opted to err on the side of caution by raising rates by 25 bps. One can almost expect a repeat of that view point in April 2023 too. With the Fed language so hawkish, the RBI is unlikely to take any risk of monetary divergence.

    

2. Even as two members of the MPC are clearly favouring going slow on rate hikes, the majority view in the MPC appears to be that the RBI should still focus on managing inflation expectations. Any let up at this stage would lead to runaway inflation.

The February inflation data is largely akin to the January data and the problem here is core inflation. Unless that is brought down, the headline inflation is likely to bounce back at every opportunity. That is what is happening at this juncture. One downside of hawkishness is that cost of funds for manufacturers has gone up by 100 bps to 9.38% in the March 2023 quarter. That can have long-term repercussions for the competitive edge of Indian companies, especially at a time when the government is trying to position India as a global manufacturing hub.