January 2024 CPI inflation falls to 5.10%, on lower food prices

13 Feb 2024 , 10:56 AM

January 24 inflation tapers to 5.10%

Even ahead of the actual consumer inflation announcement by the MOSPI, the estimates were already indicating at lower inflation in January 2024. In fact, the Bloomberg survey of economists was almost unerringly precise, pegging January 2024 headline inflation at 5.09%. The actual headline inflation number for January 2024 came in at 5.10%. The RBI would principally have two concerns despite the sharp fall in inflation. Firstly, even after the fall in inflation, the headline number is still a good 110 basis points above the RBI sustainable target of 4%. Secondly, in the last few months, the pressure has come entirely from food and fuel inflation, with core inflation continuing to trend lower. Inflation had touched 7.44% in July 2023 and 6.83% in August 2023. Also, the inflation was at 5.55% in November and 5.69% in December 2023. In comparison, January 2024 inflation at 5.10% looks benign. 

Challenge of the last mile in inflation

For the fifth month in a row, the headline inflation stayed under the outer RBI tolerance limit of 6%. In fact, in nine out of the last thirteen months, the headline inflation has stayed below the 6% mark, which is a vast improvement over the last two years. However, one must not lose sight of the fact that the headline inflation has stayed above the RBI median target of 4%, for 53 months in a row. In the February monetary policy, the RBI governor had rightly pointed out that the last mile of inflation control will be the toughest. That is when the central bank has already used up most of the aces up its sleeve and is now waiting for the normal macro adjustments to help the RBI traverse the last mile on inflation.

January 2024 Inflation: Food and core inflation edge 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 inflation. The table captures data of headline inflation, core inflation and food inflation over the last 13 months.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Dec-22	4.19%	6.10%	5.72%
Jan-23	5.94%	6.10%	6.52%
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%

Data Source: MOSPI & Ministry of Finance Estimates

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

• Let us talk about food inflation first. For January 2024, the food inflation is 123 basis points lower at 8.30%. Since July last year, the pressure has come from pulses and cereals inflation even as vegetables and fruits have seen volatile and erratic prices. With the Rabi output coming into the mandis and higher acreages being reported, the food inflation appears to be tapering. However, at 8.3%, the food inflation for January 2024 is much higher than the average food inflation of the previous 12 months at 6.54%.

   

• Let us turn to core inflation, which has been the standout feature of the last few months. For January 2024, the core inflation is 29 bps lower falling from 3.89% to 3.60%. This is one of the lowest level of core inflation that we remember in a long time. The core inflation was a direct outcome of the supply chain shocks created by the COVID pandemic and finally we are seeing the output gravitating towards the total demand across economies. Core inflation used to average over 6% a year back and now it is sharply lower. In fact, the latest core inflation reading of 3.60% is sharply lower than the average of the last 12 months at 5.07%.

   

• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.65%, the January 2024 headline inflation is sharply lower at 5.10%. However, if you consider the spike period from July 2023 to December 2023, the average headline inflation stood at 5.90%, so even headline inflation is sharply down.

The inflation tapering is visible across food inflation and core inflation in the month of January 2024. Of course, with the Red Sea crisis, the oil inflation continues to stay at elevated levels, but that is a factor that policymakers have little control over.

Rural and urban inflation – January 2024 story

Inflation has trended lower in January 2024 across urban and rural centres. This is applicable to food and non-food items. In January 2024, the headline inflation fell from 5.69% to 5.10%, but the core inflation trended lower from 3.89% to 3.60%. Let us look at how the rural and urban inflation numbers compare. Headline inflation has fallen from 5.69% to 5.10% between December 2023 and January 2024. In this same period, urban inflation has fallen from 5.46% to 4.92% while rural inflation also fell from 5.93% to 5.34%. In the same period, all-India food inflation has fallen sharply from 9.53% to 8.30%. In this period, the rural food inflation has fallen from 9.03% to 7.91% while urban food inflation has also fallen from 10.42% to 9.02%. In short, the lower inflation has been driven by food and non-food inflation in rural and urban areas. It has been a broad-based fall in inflation numbers.

Interpreting the food basket story for January 2024

Food basket with a weightage of 54.2% has been the swing factor for inflation in the second half of 2023 and that has continued in 2024 also; albeit with positive undertones. The food basket, in the table below is broken up into rural and urban inflation and the price impact is captured for all the key items in the food basket.

Food  Products	Rural Inflation  in (%)	Urban Inflation  in (%)	Headline Inflation  in (%)
Cereals and products	7.82	7.91	7.83 (9.93)
Meat and fish	0.72	1.95	1.19 (1.15)
Egg	6.22	4.62	5.60 (4.36)
Milk and products	4.76	4.34	4.64 (5.07)
Oils and fats	-16.30	-12.47	-14.96 (-14.96)
Fruits	8.57	8.79	8.65 (11.14)
Vegetables	25.82	28.92	27.03 (27.64)
Pulses and products	18.63	21.32	19.54 (20.73)
Sugar and Confectionery	7.81	6.85	7.51 (7.14)
Spices	16.86	15.27	16.36 (19.69)
Non-alcoholic beverages	3.05	3.73	3.33 (3.33)
Prepared meals, snacks.	3.45	4.58	3.97 (4.10)
Consumer Food Inflation	7.91 (8.97)	9.02 (10.43)	8.30 (9.53)

Data Source: MOSPI & Ministry of Finance Estimates

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

• Let us start with cereals inflation. The overall cereals inflation for January 2024 was sharply lower at 7.83%. However, rural cereals inflation has tapered sharply from 10.31% to 7.82%, which is a good sign for rural food prices.
• Let us turn to protein inflation comprising of milk and eggs. Overall protein inflation has gone up in January 2024 over December 2023. While milk inflation has somewhat tapered, the egg inflation is sharply higher in the latest month.

   

• What about the all-important vegetables and fruits? Surprisingly, both are almost flat, due to the volatile nature of these products. Even the RBI governor had pointed in the policy statement that vegetables will continue to stay under pressure.

   

• What about pulses inflation? The overall pulses inflation for January 2024 was lower at 19.54%, compared to 20.73% in December 2023. However, rural pulses inflation continues to be sharply lower than urban pulses inflation, although the gap is narrowing.

   

• Finally, if you look at spices, then the overall spices inflation for January 2024, it is sharply lower at 16.36% compared to 19.69%, as supplies stabilize. However, rural spices inflation continues to be higher than urban spices inflation.

There are some pressure points visible in transport and fuel inflation in the month, but that is understandable. In the food basket, it is eggs and sugar that continue to pull the food inflation higher. Inflation in pulses and cereals is down in January 2024, but the absolute inflation numbers for these products are still too high by anecdotal standards.

Why lower core inflation is a cause for celebration

In the last one year, core inflation has come down from a relatively intransigent level of 6.1% to the current level of 3.60%. Core inflation has for long been a major concern for the policymakers. Even in the Pre-Budget Economic Survey presented by the government in 2022 and 2023, the finance minister had underlined the need to bring core inflation in line. That has largely been achieved. A quick word on, what is core inflation? It is the residual inflation left in the inflation basket after removing food and fuel. Core inflation includes all other products like clothing, footwear, housing, medical expenses, entertainment etc. 

Core inflation tends to be structural in nature and hence tweaking demand and supply normally does not help. This is in contrast to food and fuel, which can be managed through well-directed policies and by managing demand and supply. Core inflation continues to be as important as headline inflation from a policy perspective. After years of the core inflation being above the 5% mark, it has dipped below 4% in the last two months. Much of the core inflation in the last few years was due to the supply chain constraints after the COVID pandemic. Then, supply failed to keep pace with demand. That to normalizing now.

States that diverged from national average inflation

The national headline inflation stood at 5.10%, but some states were substantially above the national average and some were well below the national inflation average.

• On the upside, Odisha at 7.55%, Telangana at 6.34%, Haryana at 6.24%, Gujarat at 6.21%, Rajasthan at 6.95%, Haryana at 6.72%, Telangana at 6.65%, and Karnataka at 6.11% were some of the stand-out cases of higher than national-average inflation.

   

• On the downside, Delhi at 2.56%, Madhya Pradesh at 3.93%, Kerala at 4.04%, Tamil Nadu at 4.12%, Jammu & Kashmir at 4.33%, and West Bengal at 4.52% were some of the states that reported headline inflation lower than the national average.

Clearly, it seems to be a case of the more industrialized states facing higher inflation, although Tamil Nadu seems to be an exception. Delhi seems to be the surprise package.

Will the RBI now front-end its rate cut?

In the February 2024 policy statement, the RBI governor was quite explicit that the primary focus would be on bringing headline inflation to 4%. The RBI governor pointed out that the last mile would be the toughest and hence caution was warranted. However, with the sharp fall in inflation for January 2024, there are renewed demands for the RBI to start rate cuts sooner. One can argue that the new government would only be in place by end of May and the full Union Budget for FY25 will only be presented in July 2024. Would the RBI really venture to cut rates before that? That is still a million dollar question, but some factors that do favour a rate cut.

1. If you look at the structure of the fall in inflation, it is core inflation that has come down consistently, addressing one of the most pressing problem of the post-pandemic period. Assuming that the food and fuel inflation will continue to be volatile, the good news is that policy tweaks can be used to manage food and fuel inflation. Hence, the sharp fall in core inflation may make a case for earlier rate cuts.

    

2. Secondly, with the bond yields at 7.2% and the inflation at 5.1%, the real return at above 2% is not sustainable. So, there is a case for cutting rates. Also, the current repo rates are a full 135 basis points above the pre-COVID rate. Now that pre-COVID growth levels have been overtaken meaningfully, there is a case for lowering rates.

Fow now, the RBI would prefer to play its cards close to its chest. One possibility is that it may give the first guidance on rate cuts, once the Fed actually starts its rate cut process. Either ways, rate cuts look more likely in the second half of 2024.