Jan-23 CPI inflation surges to 6.52%, led by food prices

14 Feb 2023 , 07:05 AM

On a sequential basis, the CPI inflation moved up 80 bps from 5.72% to 6.52%. The Reuters consensus estimate had pegged the inflation for January 2023 at 5.90%, so the actual headline inflation for January 2023 was sharply higher than the street estimate. There was a sharp bounce in food inflation during the month of January 2023, even as the core inflation stayed intimidatingly high at 6.1%. This is rather disappointing because between September 2022 and December 2022, the CPI inflation had sharply fallen by 169 basis points from 7.41% to 5.72%. January 2023 saw inflation bouncing back to above the RBI outer tolerance limit of 6% after staying below that mark for two months in succession.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Jan-22	5.43%	5.95%	6.01%
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%

Data Source: MOSPI & Ministry of Finance Estimates

If you compare the January 2023 CPI inflation with the peak inflation of 7.79% in April 2022, it is just about 127 basis points lower. This is contrast to the 1100 basis points fall in the wholesale price index (WPI Inflation) from the peak. However, one has to contend with the reality that WPI inflation is more sensitive to monetary tightening. Quite often, WPI inflation is a precursor to CPI inflation, so one can logically expect lower levels of CPI inflation to follow in the months to come. The villain of the piece was the sharp spike in food inflation from 4.19% in December 2022 to 5.94% in January 2023. 

One of the downsides of lower than expected Kharif output in the year 2022 is the spike in cereals inflation. For January 2023, cereals inflation spiked to 16.12%, with rural cereals inflation much higher at 17.19%. The hope is that delayed rains would have led to full reservoirs, which can boost the Rabi output. That is evident in the 25% better wheat sowing acreage this Rabi season. Food price spike is a concern in January 2023.

Rural inflation remains a thorn in the flesh

Rural inflation continues to feel pressure on multiple fronts. Between December 2022 and January 2023, rural food inflation spiked from 5.05% to 6.65%. In the monthly inflation basket mix, rural inflation is sharply higher than urban inflation, and this is also putting pressure on rural purchasing power. 

Out of the headline inflation of 6.52% for January 2023, rural inflation was 6.85% while urban India was just 6.00%. If you look at overall food inflation at 5.94%, rural food inflation was 6.65% while urban food inflation was just 4.79%. In short, urban India is cornering most of the gains of falling inflation. In the food basket, rural inflation is higher than urban inflation in the case of cereals, fruits and spices. However, rural inflation is lower for the high protein basket comprising of meat, eggs, milk products and oil & fats.

In the non-food basket, inflation for clothing, household goods, transport and communications is higher for rural India. However, there are products like footwear, fuel & lighting, healthcare, recreation and education services where the rural inflation is lower than urban inflation. It does look like a mixed rural bag in food and non-food items.

Core inflation still too high at 6.1%

Core inflation (the inflation excluding food and fuel), which had fallen to 5.9% in October, bounced back to 6.1% in December 2022. The same rate of 6.1% core inflation has been maintained in January 2023 also. Core inflation is high in rural and urban areas and that is a structural issue. The problem is that as long as core inflation remains elevated, it is hard for the headline inflation to come down meaningfully; and we have just seen evidence of that happening. Inflation is already putting a strain on urban and rural household budgets.

The reason we focus extensively on core inflation is because it is structural in nature, which makes it a lot tougher to manage and regulate. Even the last Economic Survey ahead of Union Budget 2022 had specifically underlined the need to quickly bring down the core inflation to manageable levels. The target here is to keep core inflation around 4%. However, core inflation has stayed above 6% for 8 out of the last 13 months, so headline inflation has been above 6% for 11 out of the last 13 months.

How the CPI food basket performed in January 2023

Here are some major highlights of the food basket story for January 2023.

• Let us first look at the high protein and high vitamin intake. Meat and fish inflation has risen from 5.13% to 6.04%. Inflation in eggs bounced from 6.91% to 8.78%. Oils and fats bounced further from 0.53% to 1.41% in January 2023. Inflation in milk and milk products edged marginally higher from 8.51% to 8.79% in January 2023. 

   

• Fruits inflation bounced back from 2.00% to 2.93% in January 2023. Even vegetables bounced back, despite being in negative, from -15.08% in December 2022 to –11.70% in January 2023 . Among others, pulses inflation bounced from 3.89% to 4.27%. However, the real challenge was cereals inflation in the food basket which has risen from 13.79% to 16.12%. Even spices inflation has spiked to 21.09% in January 2023. 

January 2023 has seen higher inflation across the CPI basket. For instance, higher weighted items like cereals, milk products and vegetables have all seen a sharp spike in inflation or reduced contraction (as in the case of vegetables). It was the bounce in food inflation that drove headline inflation higher in January 2023.

Will higher inflation impact RBI rates trajectory?

That remains a grey area since the spike in inflation in January 2023 was sharper than expected. RBI would worry about the spike in inflation in January, but would prefer to look at it in conjunction with IIP growth. The IIP had bounced to above 7% in November but is back to around 4% in December. However, high frequency IIP has been decisively positive.

1. A respite from rate hikes was expected in February, but the RBI decided to go ahead with a 25 bps rate hike since it preferred to err on the side of caution. In retrospect, that looks like a good decision as the markets will now absorb the higher inflation figure.

    

2. An important decision in the February monetary policy was to withdraw the accommodative stance of monetary policy in full. Going ahead, the government may rely less on monetary moves and more on fiscal moves to boost growth and also to bring down the level of inflation. That seems to be the signal.

    

3. For now, the high inflation indicates that the rates could be headed higher in India with terminal rates closer to the 7% mark. That would coincide with the terminal rate assumptions of the US Fed too. It could keep FPI flows under pressure for now.

In the inflation figure, the RBI would be closely observing two variables. Firstly, food inflation has bounced back, but that could be tempered once the Rabi flows come into the market. The second concern would be the core inflation, which has remained sticky at around 6.1%. It is here that the RBI policy moves would assume importance.