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.
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.
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.
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.
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.
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