July CPI inflation falls to 59-month low of 3.54% as food prices fall

14 Aug 2024 , 10:04 AM

JULY 2024 INFLATION AT 3.54%; BASE EFFECT HELPS

If the previous month of June 2024 was a disappointing month with consumer inflation crossing the 5% mark at 5.08%, then the month of July is redemption of sorts. However, ask any economist worth their salt and they would tell you that the sharp fall in inflation is purely optical. Why do they call it optical. CPI inflation is yoy inflation. The index number of July 2024 is dividend by the index number of 2023 to arrive at the annual inflation for the month. Now, if the base is too high or too low, it has a significant impact on the current CPI inflation. Let us understand what happened in July 2024 and how high base effect helped.

Let us understand that food inflation is about 47.5% of the overall consumer inflation basket, so we have to look at cues in the food basket as a swing factor in overall inflation. Let us first look at how headline inflation moved in the year-ago period. Between June 2023 and July 2023, the headline inflation moved up from 4.81% to 7.44%. This was after it became clear that India would falter on agricultural output and food prices spiked. If you look at food inflation between June 2023 and July 2023, it spiked from 4.49% to a whopping 11.51%. This has led the food inflation to taper sharply between June 2024 and July 2024 from 9.36% to 5.42%. This has been the key reason for the fall in headline inflation in July.

READING CPI INFLATION WITH WPI INFLATION

The best way to read consumer inflation is in conjunction with wholesale inflation or producer inflation. The WPI inflation is normally reported about 2 days after the CPI inflation is reported. There are two basic differences and that is what makes their combination critical. The CPI inflation gives the highest weightage to food inflation while WPI inflation gives the highest weightage to manufacturing inflation. The WPI inflation is, therefore, a much barometer of the inflation that manufacturers are experiencing while CPI is a better reflection of the inflation that households experience at the consumer level. There is also a linkage in that the CPI inflation normally acts as the lag effect while WPI inflation is the lead indicator, and this relationship is most prominent in the impact on core inflation. In fact, as WPI inflation was moving down in the last 1 year, the core inflation move in tandem, and now it is reversing direction gradually as the fall gets saturated.

JULY REPORT : BASE EFFECT HELPS FOOD INFLATION TO SOBER

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 has 13 months data.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Jun-23	4.49%	5.11%	4.81%
Jul-23	11.51%	4.94%	7.44%
Aug-23	9.94%	4.79%	6.83%
Sep-23	6.56%	4.52%	5.02%
Oct-23	6.61%	4.26%	4.87%
Nov-23	8.70%	4.11%	5.55%
Dec-23	9.53%	3.89%	5.69%
Jan-24	8.30%	3.59%	5.10%
Feb-24	8.66%	3.37%	5.09%
Mar-24	8.52%	3.24%	4.85%
Apr-24	8.70%	3.23%	4.83%
May-24	8.69%	3.12%	4.80%
Jun-24	9.36%	3.11%	5.08%
Jul-24	5.42%	3.40%	3.54%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key takeaways from the table above.

• Before we start off on inflation basket, a quick word on the base effect. The CPI inflation is yoy inflation so it is vulnerable to the base effect. Between June 2023 and July 2023, the headline inflation had fallen from 5.08% to 3.54%, while the food inflation had also fallen sharply from 9.36% to 5.42%. The sharp fall in the food inflation and, consequently, the headline inflation can be attributed to this base effect.
• Let us talk about food inflation first. For July 2024, food inflation came in at 5.42%; which is 394 bps lower than the food inflation in June 2024. If you compare with the average food inflation of the last 12 months at 8.43%, the July 2024 inflation is 301 bps lower. Key items in the food basket like vegetables, fruits and cereals accounted for most of the fall in food inflation in July 2024, although pulses continue to be elevated.
• We will not spend too much time on energy inflation due to its regulated nature, but suffice to say that it went deeper into the negative during the month of July 2024. In July 2024, core inflation was up from 3.11% to 3.40% and that can be attributed to the highest implicit costs of the trade disruptions and the cumulative effect of post COVID normalization in core inflation bottoming out. More importantly, core inflation has fallen by 200 basis points in the last one year. With food inflation being volatile and eccentric, low core inflation is essential for the Indian inflation basket to be under check.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.38%, the July 2024 headline inflation is sharply lower at 3.54%. However, the one big swing factor for CPI inflation in India has been the food prices and that could hold the key to inflation. More importantly, the RBI cannot afford to let the headline inflation diverge more than 100 basis points from the inflation target of 4% as that impacts inflation expectations and that is already visible in RBI Forward looking surveys.

One of the concerns has been that rural India is bearing the brunt of higher inflation in India. Is that actually the case? Interestingly, data appears to corroborate that view.

NON-FOOD INFLATION: HOW URBAN AND RURAL BASKETS STACKED UP

Let us first look at the macro picture of rural and urban inflation. For July 2024, the headline inflation was lower at 3.54%, compared to 5.08% in June 2024, while food inflation was sharply lower by 394 basis points at 5.42%. How do rural and urban India resonate, and is there an inflation divide. Let us start with headline inflation; lower by 154 bps at 3.54% for July 2024. How does the break-up look? Between June and July 2024, urban inflation fell by 141 bps from 4.39% to 2.98%. During the same period, rural inflation also fell by 156 bps from 5.66% to 4.10%. While rural inflation has also fallen, it is higher in absolute terms.

Let us turn to food inflation movement in rural and urban India between June and July 2024. Between June and July 2024, urban food inflation fell by 496 bps from 9.60% to 4.63%. However, in the same period, rural inflation also fell by 326 bps from 9.15% to 5.89%. For the month of July, both rural and urban inflation are significantly lower. However, this could be largely attributed to the base effect and we would get a clearer picture only when the base effect is eliminated. Let us first look at the non-food basket for July 2024 with a break-up of rural and urban non-food inflation.

Non-Food Basket	Non-Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Clothing	6.32	2.65	2.96	2.76
Footwear	1.04	1.43	2.84	1.99
Clothing and footwear	7.36	2.50	2.94	2.67
Housing	–	–	2.68	2.68
Fuel and light	7.94	-3.02	-9.50	-5.48
Household goods and services	3.75	1.88	2.87	2.33
Health	6.83	3.91	4.31	4.06
Transport and communication	7.60	2.75	2.17	2.48
Recreation and amusement	1.37	2.28	2.11	2.20
Education	3.46	3.48	3.35	3.43
Personal care and effects	4.25	8.35	8.58	8.44
Miscellaneous	27.26	3.87	3.64	3.79

Data Source: MOSPI & Ministry of Finance Estimates

Where is rural India scoring on inflation and where is urban India scoring on the inflation story? One of the major items where there is a huge gap is fuel and lighting. In this case, while the overall fuel & light inflation is at -5.48%, the urban inflation stands at -9.50% while rural inflation is -3.02%. Even the transport and communication inflation is higher in rural areas at 2.75% compared to 2.17% in urban India. However, rural inflation has been lower in items like household goods & services, healthcare, and personal care items. Despite that, the pressure from fuel, lighting, transport, and communication is resulting in rural stress.

FOOD BASKET: HOW RURAL AND URBAN INDIA STACKED UP?

Food basket with a weightage of 47.25% continues to be the swing factor for inflation since mid-2023; and July 2024 was no different. The food basket is broken into rural and urban inflation to capture the granular impact.

Food Basket	Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Cereals and products	12.35	8.44	7.54	8.14
Meat and fish	4.38	5.43	6.89	5.97
Egg	0.49	6.94	6.60	6.76
Milk and products	7.72	2.71	3.55	2.99
Oils and fats	4.21	-1.21	-1.01	-1.17
Fruits	2.88	4.67	3.00	3.84
Vegetables	7.46	9.60	2.74	6.83
Pulses and products	2.95	14.14	16.02	14.77
Sugar and Confectionery	1.70	5.25	5.17	5.22
Spices	3.11	-2.17	0.18	-1.43
Non-alcoholic beverages	1.37	1.89	2.87	2.29
Prepared meals	5.56	2.92	4.02	3.48
Food Basket	47.25	5.89	4.63	5.42

Data Source: MOSPI & Ministry of Finance Estimates

Here are the key items in the inflation basket across rural and urban segments.

• Let us start with cereals inflation. The overall cereals inflation for July 2024 was about 61 bps lower at 8.14%. The rural cereals inflation at 8.44% was higher than the urban cereals inflation at 7.54% for June 2024; largely on account of lower cereals output last season.
• Let us turn to high protein inflation. Overall protein inflation has sobered in July 2024 for milk and eggs; continuing the trend of June 2024. Even meat products inflation is lower for June 2024. The fall in high protein inflation has been much sharper in rural areas, which is a good sign.
• What about the all-important vegetables and fruits? Vegetables inflation fell sharply from 29.32% in June 2024 to just 6.83% in July 2024. Fall in vegetables inflation is much sharper in urban India than in rural India. In vegetables and fruits, the rural inflation is sharply higher than urban inflation.
• What about pulses inflation? The overall pulses inflation for July 2024 was still elevated at 14.77%, despite the high base effect. Rural pulses inflation at 14.14% is lower than the urban pulses inflation at 16.02%.
• Finally, if you look at spices, then the overall spices inflation for July 2024 has dipped into negative at -1.43%. This compares favourably with 2.06% in June, 4.27% in May, 7.50% in April, and 11.40% in March 2024. Rural spices inflation is sharply lower than urban spices inflation.

The month has seen a sharp fall in food inflation, thanks due to the base effect. A good Kharif would be the key to lowering food inflation in the coming months.

HOW STATE-WISE INFLATION DIVERGED IN JULY 2024

While the national average CPI inflation was 3.54% in June, the rural inflation is much higher at 4.10%, compared to just 2.98% for urban India. Here is the state-wise inflation story.

• On the upside, Bihar at 5.87%, Assam at 5.11%, Odisha at 4.83%, Uttar Pradesh at 4.57%, Haryana at 4.52%, and Kerala at 4.51% were some of the stand-out cases of higher than national-average inflation.
• On the downside, Jharkhand at 1.72%, Delhi at 2.06%, Chhattisgarh at 2.16%, Rajasthan at 2.53%, and Uttarakhand at 2.81% were some of the states that reported headline inflation much lower than the national average.
• In terms of rural in Bihar, Uttar Pradesh, Odisha, and Haryana reported highest rural inflation, while Jharkhand, Telangana, Delhi, and Chhattisgarh reported lowest rural inflation. In the case of urban inflation; Bihar, Assam, Kerala, Maharashtra, and Haryana were on top while Himachal Pradesh, Uttarakhand, Chhattisgarh, Jammu & Kashmir, and Jharkhand were at the bottom of the list.

Out of the 22 states, only 2 states reported above 5% inflation, and 6 states above 4% inflation, which can be attributed to the high base effect.

FIVE REASONS FOR RBI TO CONSIDER RATE CUTS IN OCTOBER 2024

The RBI opted to hold status quo on rates in the August policy. However, the prospects of the RBI cutting rates in October policy are fairly high. Here is why.

• The latest headline inflation number has come in sharply lower at 3.54%. Even if you were to factor in the base effect, the RBI would have the benefit of one more inflation data point in September before taking the final call in October.
• The Fed is very likely to cut rates by either 25 bps by September and 50 bps by November. That would address the issue of weak labour and growth data. For the RBI, that would be a clarion call to act, to avoid monetary divergence risks.
• IIP growth in June was sharply lower at 4.24%. The pressure comes from manufacturing sector and it would have been lower had it not been for support from mining. Higher cost of funds and higher input costs are playing a role. A rate cut would give relief.
• The repo rates at 6.50% are a full 135 bps above the pre-COVID rates of 5.15%. With most macro parameters much better compared to the pre-COVID levels, there is no reason not to start unwinding the rate hikes.
• Last, but not the least, the real rates of interest in India are still too high and that is distorting the yield curve in India. Lower costs will help banks raise CASA deposits.

August was always like the toss of a coin, but the likelihood of a rate cut in October has brightened after the latest IIP and CPI inflation reading.