July 2023 CPI inflation surges to 7.44%, as food inflation spikes

16 Aug 2023 , 09:54 AM

When the May CPI inflation was announced by the MOSPI in mid-June at 4.25%, it was a moment of celebration. And, rightly so! India was just about 25 bps away from its avowed inflation target of 4%, while the US was still about 200 bps away from its 2% target at that point of time. Delayed monsoons, followed by deluges in certain parts, played havoc with the production and supply of key items in the food basket. The prices of cereals, pulses and vegetables spiked. The June inflation spiked to 4.81%, but the real concern has come with July inflation at a whopping 7.44%. In just about 2 months, Indian inflation has moved 344 bps away from its target of 4% and most of the pressure has come from food inflation. 

Even before the MOSPI announced the July inflation, a day ahead of India’s 77th Independence Day celebration, the July CPI inflation was expected to gradually increase back to 6%. However, the ferocity of the bounce in inflation was unexpected. It was not just higher than the Reuters consensus estimates but also a full 263 bps higher than the June inflation. In the last 3 months, the debate has ranged from back-ending rate cuts to forgetting about rate cuts and now to rate hikes. At the time of the August RBI policy presentation, the markets were already factoring in a 50% probability of a 25 bps increase in rates by October. Now it looks very likely that the RBI may intervene and raise rates in October or probably even effect an interest rate hike in the interim period. After all, the spike in the inflation amidst the RBI keeping rates static since February is hardly a very comfortable situation to have.

CPI Inflation touches highest level in 15 months

Just two months back, when the May inflation had touched a low of 4.25%, it was the lowest level in 25 months. Things have changed a lot in just 2 months with CPI inflation now at a 15-month high of 7.44%. Between February 2023 and May 2023, the fall in headline inflation from 6.44% to 4.25% was supported by a sharp fall in food inflation. That has been reversed and more in just one month, with food inflation taking the CPI inflation to 15-month high levels. Between February and May 2023, food inflation fell from 5.95% to 2.91%; a fall of 304 basis points. In just the last 2 months, food inflation has surged from 2.91% to 11.51%. The only positive takeaway is that core inflation has remained steady. 

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
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%
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%	5.10%	7.44%

Data Source: MOSPI & Ministry of Finance Estimates

Back in April 2022, inflation had peaked at 7.79%. Since then, the rate of CPI inflation had tapered steadily from 7.79% to 4.25% over the next 13 months. In just 2 months, India CPI inflation has spiked to 7.44% and it is not just about 35 bps short of the peak of April 2022. One can argue that this is more of a cyclical phase due to erratic monsoons, but the fact of the matter is that a lot of the inflation efforts have been neutralized by this one spike. At the end of the day, one has to reflect whether stopping rate hikes in February was a good idea or not, since that possibly fanned inflation. However, that would be more like being prophets of the past and that is not too helpful in policy making. It cannot be refuted that the success of monetary policy will lie in keeping the inflation as close to the 4% mark as possible. That is clearly not happening at this juncture.

Thanks to the spike in prices of vegetables and other food items, economists apprehend that the food inflation could spike even higher in August the next 2 months, depending on how the stock flows into mandis shape up. It is not just about the cropping output, but also about how soon the supply chains are restored rapidly. There have been some big disappointments in the food basket in the July inflation statement. For example, vegetable inflation has spiked to 37.34%, spices inflation to 21.63%, pulses inflation to 13.27% and cereals inflation to 13.04%. Clearly, the essence of the food basket is experiencing unprecedented inflation. This is worrisome since food has nearly 50% weightage in the CPI index basket with cereals and vegetables being heavyweights among them.

Urban food inflation was worse than rural food inflation in July 2023

Here is the macro picture. Let us start with the previous month of June 2023. In the month of June, overall food inflation went up from 2.96% to 4.55%. Overall, the inflation was higher in urban and rural areas, but the spike in food inflation was higher in urban areas. The situation is a lot more serious in July 2023 on the food inflation front. Overall food inflation has spiked from 4.55% to 11.51%. However, for the month of July 2023, while rural food inflation stood at 11.06%, it was urban food inflation that had surged to 12.32%. However, if you look at overall inflation, the pressure is more on rural inflation and that could be more due to the pressure from the non-food items in the inflation basket.

Let us look at some of the key items in the inflation basket and compare the rural and urban scenarios. 

• Let us start with cereals inflation. The overall cereals inflation for July 2023 was at 13.04%. However, rural cereals inflation at 13.72% was much higher than urban cereals inflation at 11.55%. 

   

• Let us now turn to milk inflation. The overall milk inflation for July 2023 was at 8.34%. However, rural milk inflation at 8.60% was higher than urban milk inflation at just about 7.90%.

   

• What about the all-important vegetables inflation? The overall vegetables inflation for July 2023 was at 37.34%. However, rural vegetables inflation at 34.64% was much lower than urban vegetables inflation at 41.58%.

   

• What about pulses inflation? The overall pulses inflation for July 2023 was at 13.27%. However, rural pulses inflation at 12.65% was lower than urban pulses inflation at 14.57%.

   

• Finally, if you look at spices, then the overall spices inflation for July 2023 is at 21.63%. However, retail spices inflation at 22.21% is higher than urban spices inflation which stands at 20.50%.

Among non-food items, inflation in fuel & lighting and in transportation continue to be low on a yoy basis, but that is more due to the base effect. Core inflation has remained static at 5.1%, but that is largely helped along the way by some constriction in consumer demand.

How will this inflation number impact the RBI monetary stance?

The August RBI policy marked the third successive policy in which there were no rate hikes. The last rate hike was in February 2023. However, the latest spike in inflation could change the equations of the RBI with respect to future repo rate trajectory. Even ahead of the August policy, the market consensus was that there could be a 50% probability of a 25 bps rate hike in the next 2 policies. However, with inflation at 7.44% and just short of its April 2022 peak of 7.79%, the RBI may think about rate cuts more seriously. Here is why.

1. With the spike in inflation, any rate cut discussions are off the table for the time being. If you read through the minutes of the last two policies, it is clear that the RBI nominated members of the MPC continue to be very hawkish even though the others are veering towards a more neutral stance. The latest inflation number should dispel all such dichotomies and bring all of them on an anti-inflation stance.

    

2. Now, the debate about when rates will be cut. It is not even about how long the RBI would pause on rates. The debate is now about whether the RBI will wait till October to hike rates by 25 bps or would it move quickly to hike rates in the interim period itself. That is possible as it may want to pre-empt any market reaction ahead of the August inflation number to be announced in mid-September.

    

3. Ahead of the July inflation announcement, the street consensus was already that the inflation would go above 6% in July and August. However, the ferocity of the spike in inflation was largely unexpected. That is likely to make the RBI wary. FPIs are already getting wary of Indian markets and the RBI would not want a situation wherein the real rate gap goes up further. With inflation at 7.44%, real interest rates in India are already in the negative zone.

To sum it up, rate cut debates are off the table for now. Even the stance may change to a more hawkish tone very soon. The question is not even about how long the RBI would pause on raters. The issue is whether the RBI would wait till October for a rate hike or whether it would implement a rate hike in the interim period itself. Global central banks are still hawkish despite US inflation coming down. We all know that the RBI camp within the MPC wants to front-end rate hikes to dismiss any chance of a future spike in inflation. Another rate hike looks almost inevitable now. The question is not whether, but when!