February 2024 CPI inflation flat at 5.09%, as food prices edge higher

13 Mar 2024 , 09:36 AM

FEBRUARY 2024 INFLATION FLAT AT 5.09%

The Bloomberg survey of economists, conducted ahead of the actual inflation reading, was almost unerringly precise, once again in February 2024. The survey had projected headline inflation for February 2024 at 5.10% and the actual number came in at 5.09%. If you break up the inflation number, this flat inflation is despite a 30 bps fall in core inflation. That is because, the food inflation is higher by 36 bps and energy inflation is also marginally higher, which has offset the core inflation gains. The pressure on the food inflation basket came from the high protein items, vegetables, and pulses. At the current juncture, the RBI may still have two concerns. Firstly, the headline number is still a good 109 basis points above the RBI long-term inflation target of 4%. Secondly, while core inflation has been suppressed by the normalization of supply chains, most of the pressure is coming from food and fuel. While inflation at 5.09% for February 2024 was lower than the RBI outer tolerance limit of 6%, it also marks the 53rd month in succession of inflation above 4%.

RED SEA CRISIS; THE SHIPS DON’T LIE

The problems in the Red Sea zone are now starting to have its impact on the non-core inflation in India. Food inflation at 8.66% for February is just too high for comfort and the rural inflation continues to be a major challenge. Also, the crisis in the Red Sea has forced most ships to take the circuitous Horn of Africa route, which is adding to freight costs and insurance charges; apart from disrupting delivery schedules. In India, supply of food is still under stress, despite the best efforts of the current government. The Rabi has been much better than expected, but that is still not translating into lower food inflation. India may claim that its domestic-oriented economy is not too dependent on trade, but the impact is surely showing up on the inflation number.

FEB-24 INFLATION: FOOD HIGHER, CORE INFLATION LOWER

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 below captures data of headline inflation, core inflation and food inflation over the last 13 months.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
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%
Jan-24	8.30%	3.60%	5.10%
Feb-24	8.66%	3.30%	5.09%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key points we can decipher from the table.

• Let us talk about food inflation first. For February 2024, food inflation is 36 basis points higher at 8.66%. Most of the pressure is coming from vegetables, pulses and the high protein items like meat and eggs. Clearly, the sense of disillusionment among the farmers is also partly responsible for the current situation. At 8.66%, the food inflation for February 2024 is nearly 212 basis points higher than the average food inflation of the last 12 months and has been persistently at an elevated level since June 2023.
• Let us turn to core inflation, which has been the saving grace in the month of February; largely offset the pernicious impact of food inflation. For February 2024, the core inflation is 30 bps lower compared to January 2024 and a full 59 bps lower than December 2023. In fact, if you look at the core inflation since February 2023, it is down a good 300 basis points from 6.30% to just about 3.30%. Remember, the core inflation is already well below the RBI target rate of 4% inflation, so food and fuel only need to cooperate a little more to keep inflation under check overall. Clearly, the supply chain situation is correcting a lot faster than expected.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.65%, the February 2024 headline inflation is lower at 5.09%. The average inflation has hovered closer to 6.00% since June 2023 and the current level of headline inflation is well below that.

The month of February 2024 has seen a virtual dichotomy in the performance of the inflation components. Core inflation continues to trend lower and fuel inflation is exerting pressure; but it is the 36 bps spike in food inflation that actually forced the headline inflation to remain flat in the month of February.

FOOD INFLATION STRESS IN RURAL AND URBAN INDIA

The broad trend is also true on a granular basis. For instance, rural and urban food inflation are higher in February compared to January 2024. For the month of February 2024, the headline inflation was flat at 5.09%, compared to 5.10% in January 2024, despite the core inflation trending lower from 3.60% to 3.30%. Let us look at how the rural and urban inflation numbers compare. Headline inflation is flat at 5.09% in February 2024. In this same period, urban inflation has fallen from 4.92% to 4.78% while rural inflation is absolutely flat at 5.34%. In the same period, all-India food inflation has risen sharply from 8.30% to 8.66%. In this period, the rural food inflation has risen from 7.91% to 8.21% while urban food inflation has also risen from 9.02% to 9.19%. While the falling core inflation has offset the higher food inflation in urban areas, the food inflation is putting all the pressure on rural pockets of India.

WHAT WE READ FROM THE FOOD BASKET IN FEBRUARY 2024

Food basket with a weightage of 39% (post the weightage cut) has been the swing factor for inflation in the second half of 2023 and continued in 2024. The food basket, in the table below, is broken into rural and urban inflation and price impact is captured for each item.

Food Products	Rural Inflation in (%)	Urban Inflation in (%)	Headline Inflation in (%)
Cereals and products	7.53	7.72	7.60 (7.83)
Meat and fish	4.88	5.71	5.21 (1.19)
Egg	10.64	10.89	10.69 (5.60)
Milk and products	4.04	3.62	3.86 (4.64)
Oils and fats	-15.90	-11.67	-13.97 (-14.96)
Fruits	4.96	4.76	4.83 (8.65)
Vegetables	29.54	31.38	30.25 (27.03)
Pulses and products	18.05	20.47	18.90 (19.54)
Sugar and Confectionery	7.70	6.96	7.48 (7.51)
Spices	13.64	13.28	13.51 (16.36)
Non-alcoholic beverages	2.71	3.41	2.97 (3.33)
Prepared meals, snacks.	3.22	4.24	3.69 (3.97)
Consumer Food Inflation	8.21 (7.91)	9.19 (9.02)	8.66 (8.30)

Data Source: MOSPI & Ministry of Finance Estimates

Here are the key items in the inflation basket across rural and urban segments. For all individual food items and for totals, previous month data is in adjacent brackets.

• Let us start with cereals inflation. The overall cereals inflation for February 2024 was slightly lower at 7.60%. The good news is that rural cereals inflation has also tapered sharply from 7.82% to 7.53%, which is good for rural food prices.
• Let us turn to high protein inflation. Overall protein inflation has gone up sharply in February for meat products and eggs, while the milk inflation has shown visible signs of tapering in the month of February 2024.
• What about the all-important vegetables and fruits? In February 2024, most of the pressure came from vegetables inflation; which spiked from 27.03% to 30.25% over last month, with uniform pressure coming from the rural and the urban areas.
• What about pulses inflation? The overall pulses inflation for February 2024 has trended slightly lower to 18.90% compared to 19.54% in January 2024. However, rural pulses inflation continues to be sharply lower than urban pulses inflation.
• Finally, if you look at spices, then the overall spices inflation for February 2024 is sharply lower at 13.51% compared to 16.36% in the previous month, as supplies stabilize. Rural and urban spices inflation continue to remain in double-digits.

There are some pressure points visible in transport and fuel inflation in the month, but that is understandable amidst the ongoing Red Sea crisis and considering that India still imports 80% of its crude oil needs. Since the weak Kharif output last year, there is persistent pressure coming from pulses, cereals, and vegetables; key items in the food basket.

WHAT IS LOWER CORE INFLATION TELLING US?

Core inflation has been an amazing success story in the last few months. If you look at the last one year, core inflation has come down from a relatively intransigent level of 6.30% to the current level of 3.30%. Now, core inflation has dipped below the RBI comfort zone of 4% for headline inflation. That gives more room for the volatility in food and fuel. However, there is a bigger tale in the way core inflation has come down. Just as demand picked up rapidly in the aftermath of the pandemic, causing runaway inflation, the supplies are now picking up at a rapid pace and that is resolving the core inflation problem. Core inflation is the residual inflation in the basket after removing food and fuel. It includes clothing, footwear, housing, medical expenses, and entertainment. With global supply chains normalized, it looks unlikely that core inflation would reappear for now. Policy focus can shift to reining in food inflation and fuel inflation.

HOW STATE-WISE INFLATION DIVERGED IN FEBRUARY 2024

The national headline inflation stood at 5.09%, but some states were substantially above the national average, while some were well below the average.

• On the upside, Odisha at 7.55%, Telangana at 6.71%, Haryana at 6.28%, Assam at 6.02%, Jharkhand at 5.85%, Karnataka at 5.74%, and Andhra Pradesh at 5.66% were some of the stand-out cases of higher than national-average inflation.
• On the downside, Delhi at 2.42%, Madhya Pradesh at 3.86%, Uttarakhand at 3.95%, and West Bengal at 4.35% were some of the states that reported headline inflation lower than the national average.

Clearly, it seems to be a case of Odisha continuing to experience the highest inflation while Delhi faced the lower inflation in the month of February 2024; a trend noticed quite evidently in recent months.

RBI LIKELY TO EVALUATE RATE CUTS AFTER JULY 2024

Will flat inflation and falling core inflation induce rate cuts by the RBI? If one reads through the February monetary policy statement issued by the RBI and the minutes of the MPC meeting, four things emerge.

1. Firstly, RBI would prefer a situation where food inflation is a lot more predictable. Since June 2023, food has been the major driver of headline inflation, even as core inflation has been consistently tapering. The RBI is unlikely to move on rate cuts, till there is clarity on the food inflation front.
2. Secondly, the Red Sea crisis continues to be the biggest challenge for the current government. While India is largely inward looking, the Red Sea crisis is already having an impact on food prices and fuel prices as deliveries are getting delayed, even as goods and services are becoming costlier. That is likely to continue till the stand-off goes on.
3. The RBI will look beyond just the real rates and inflation for its rate decision. For now, the major focus of the RBI would be on the political equations post the elections. It would not want to cut rates and trigger runaway inflation just ahead of the general elections. That may not be a very palatable outcome.
4. Lastly, the RBI may wait for the US Fed to make its first move. The Fed chair in his testimony to the Congress last week, hinted at rate cuts in 2024, which was interpreted as a positive signal by the markets. However, RBI is unlikely to move on rates till the full budget is presented in July 2024, which is still a good 4 months away.

The RBI would most likely wait for the full budget to be presented and evaluate the fiscal deficit and spending targets before taking a view on rate cuts. For now, the first step for the RBI would be to move the stance of the monetary policy to neutral. Till then, the RBI is unlikely to move on rate cuts. The latest inflation will just reinforce that argument.