June CPI inflation touches 4-month high of 5.08% on food price spike

18 Jul 2024 , 09:18 AM

JUNE 2024 INFLATION AT 5.08%; ABOVE STREET ESTIMATES

The consumer inflation (CPI) had been on a consistent downtrend since December 2024. From a high of 5.69% in December 2023, the CPI inflation had gradually tapered to 4.80% in May 2024. Here it must be reported that the May inflation was originally reported as 4.75% but was later upped to 4.80% as additional data came in. In a sense the inflation in June 2024 was higher than expected. A spike in inflation was on the cards and the Bloomberg estimates had pegged the CPI inflation for June at around 4.9%. However, the headline inflation for June 2024 shocked the street at 5.08%, nearly 18 bps higher than the consensus street estimates. After being under 5% for 3 months in a row, the inflation is now again back above 5%. This higher inflation was triggered by food prices, but we come back to that later.

If you look at the break-up of headline inflation for June 2024, the food inflation came in 67 bps higher at 9.36%. Core inflation was almost flat at 3.11%, almost the same level that it was in the previous month. In India, energy inflation is not much of an issued because it has a relatively smaller weight and also the prices of most energy products are largely regulated, so the tools to control energy inflation in India are a lot more potent. Food inflation spiked on the back of higher than expected inflation in vegetables and a spike in prices of cereals. Economists have been expecting some impact of the higher MSP (minimum support price) on the food basket, but June inflation was largely driven by delayed monsoons. In the last few weeks, the monsoons have made up, so July inflation should hopefully be sober.

JUNE REPORT : FOOD PRICES TRIGGER HIGHER HEADLINE INFLATION

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%

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 May 2023 and June 2023, the headline inflation had risen from 4.25% to 4.81%, while the food inflation had also risen from 2.91% to 4.49%. Despite this higher base effect, both food inflation and headline inflation in June 2024 are up sharply. That means; but for the base effect, the impact on inflation could have been steeper.
• Let us talk about food inflation first. For June 2024, food inflation came in at 9.36%; which is 67 bps higher than the food inflation in May 2024. If you compare with the average food inflation of the last 12 months at 8.35%, the June 2024 inflation is 101 bps higher. Clearly, that appears to be the sore point. Key items in the food basket like vegetables, fruits and cereals accounted for most of the spike in food inflation, even as there was some sobering in the prices of pulses in June 2024.
• We will not spend too much time on energy inflation due to its regulated nature, but one of the positive surprises has been the core inflation story. In June 2024, core inflation was almost flat at 3.11%. With the supply chain constraints of the post-COVID period getting normalized, core inflation is getting back to sub-3% levels. More importantly, the core inflation has fallen sharply by 200 basis points in the last one year. With food inflation continuing to be volatile and unpredictable, low core inflation is essential for the Indian inflation basket to be under control.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.41%, the June 2024 headline inflation is still lower at 5.08%. 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 eventual inflation target of 4%.

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.

RURAL INFLATION STRESS – HOW NON-FOOD BASKET PLAYED OUT?

In India, several industries like FMCG, automobiles, two-wheelers, financial services etc rely heavily on rural demand. In the last few quarters, these companies have felt the impact of slowing rural demand. Not only have rural incomes been under pressure, even the rural inflation has been more elevated compared to urban inflation. Let us first look at the macro picture of rural and urban inflation. For June 2024, the headline inflation was higher at 5.08%, compared to 4.80% in May 2024, while food inflation was sharply higher by 67 basis points at 9.36%%. How do rural and urban India resonate, and is thee an inflation divide.

Let us start with headline inflation; higher by 28 bps at 5.08% for June 2024. How does the break-up look? Between May and June 2024, urban inflation rose 18 bps from 4.21% to 4.39%. However, in the same period, rural inflation increased by 32 bps from 5.34% to 5.36%. Not only is headline rural inflation more elevated, but even the spike is higher. Let us turn to food inflation movement in rural and urban India between May and June 2024. Between May and June 2024, urban food inflation rose 72 bps from 8.83% to 9.55%. However, in the same period, rural inflation increased by just 53 bps from 8.62% to 9.15%. While urban India is feeling the stress of higher food inflation, the rural India is feeling greater stress of non-food inflation. Let us first look at the non-food basket for June 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	2.76	2.91	2.82
Footwear	1.04	1.54	2.85	2.05
Clothing and footwear	7.36	2.56	2.89	2.73
Housing	–	–	2.69	2.69
Fuel and light	7.94	-0.77	-8.34	-3.66
Household goods and services	3.75	2.05	2.82	2.39
Health	6.83	3.98	4.38	4.13
Transport and communication	7.60	1.24	0.68	0.97
Recreation and amusement	1.37	2.47	2.36	2.39
Education	3.46	3.41	3.73	3.57
Personal care and effects	4.25	7.97	8.37	8.18
Miscellaneous	27.26	3.50	3.31	3.41

Data Source: MOSPI & Ministry of Finance Estimates

Where is the overall pressure on rural inflation coming from. 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 -3.66%, the urban inflation stands at -8.34% while rural inflation is -0.77%. Even the transport and communication inflation is sharply higher in rural areas at 1.24% compared to 0.68% in urban India. However, rural inflation has been lower in items like clothing & footwear, household goods, health, and personal care effects. Despite that, the pressure from fuel, lighting, transport, and communication is accounting for most of the rural stress.

VEGETABLES GET DEARER IN JUNE 2024

Food basket with a weightage of 47.25% continues to be the swing factor for inflation since mid-2023; and June 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	9.00	8.14	8.75
Meat and fish	4.38	5.04	6.09	5.39
Egg	0.49	4.03	4.05	3.99
Milk and products	7.72	2.78	3.34	3.00
Oils and fats	4.21	-2.99	-2.25	-2.68
Fruits	2.88	7.37	6.86	7.15
Vegetables	7.46	30.20	27.94	29.32
Pulses and products	2.95	15.42	17.41	16.07
Sugar and Confectionery	1.70	5.86	5.76	5.83
Spices	3.11	1.28	3.69	2.06
Non-alcoholic beverages	1.37	2.12	2.76	2.36
Prepared meals	5.56	3.03	4.08	3.49
Food Basket	47.25	9.15	9.55	9.36

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 June 2024 was 6 bps higher at 8.75%. The rural cereals inflation at 9.00% was higher than the urban cereals inflation at 8.14% for June 2024; largely on account of lower cereals output last season.
• Let us turn to high protein inflation. Overall protein inflation has come down sharply in June 2024 for milk and eggs. 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? In June 2024, the vegetables inflation was again the bane at 29.32%, compared to 27.33% in May 2024. In vegetables and fruits, the rural inflation is sharply higher than urban inflation.
• What about pulses inflation? The overall pulses inflation for June 2024 has lower by 107 bps at 16.07%. Interestingly, the sharp fall in pulses inflation was rural pulses inflation falling to 15.42% against 17.41% in urban India.
• Finally, if you look at spices, then the overall spices inflation for June 2024 is sharply lower at 2.06%; compared to 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 spike in food inflation, largely on account of the spike in vegetable prices. However, high protein inflation is sharply down in rural India, which is good news.

HOW STATE-WISE INFLATION DIVERGED IN JUNE 2024

While the national average CPI inflation was 5.08% in June, the rural inflation is much higher at 5.66%, compared to just 4.39% for urban India. Here is the state-wise inflation story.

• On the upside, Odisha at 7.22%, Bihar at 6.37%, Karnataka at 5.98%, Andhra Pradesh at 5.87%, Kerala at 5.83%, Rajasthan at 5.83%, and Assam at 5.67% were some of the stand-out cases of higher than national-average inflation.
• On the downside, Delhi at 2.18%, Uttarakhand at 2.89%, Punjab at 3.81%, Himachal Pradesh at 3.86%, and West Bengal at 4.03% were some of the states that reported headline inflation that were much lower than the national average.
• In terms of rural inflation stress; Odisha, Karnataka, Bihar, and Andhra Pradesh reported highest rural inflation, while Delhi, Uttarakhand, Punjab, and Maharashtra had lowest rural inflation. In the case of urban inflation; Telangana, Rajasthan, Odisha, and Bihar were on top while Uttarakhand, Delhi, Himachal Pradesh, and Jammu & Kashmir were at the bottom of the list.

Out of the 22 states, 14 states reported above 5% inflation, which could be attributed to a surge in election related spending.

AUGUST IS OK, BUT RBI MUST EXPLORE RATE CUTS IN OCTOBER

The immediate reaction of most economists to the higher than expected inflation was that rate cuts would be off the agenda for the time being. In fact, some even went to the extent of predicting that rate cuts would not happen in India before December 2024. It is hard to second guess what the RBI MPC members have in mind, but here is what should be on the  RBI agenda. It is fine if the RBI lets August go, but the RBI should seriously think of rate cuts in the October. Here is why.

• In the last MPC meeting, 2 out of the 6 members voted for a 25 bps cut and shifting the stance of the monetary policy from “gradual withdrawal of accommodation” to a Neutral stance. The MPC is clearly getting divided over the subject of rate cuts.
• If you look at the real rates in India, they are, on an average, between 200 bps and 210 bps. This is too high by anecdotal standards as India used to traditionally maintain a real rate of around 1%. That is good enough reason to cut rates, since the argument of high real rates to ensure transmission of rate hikes is not valid any longer.
• Lastly, at 6.50%, the repo rates in India are a full 135 bps above the pre-COVID rate of 5.15%. That is the level they have stayed since February 2023. With great difficulty, India has acquired the momentum of being the fastest growing large economy in the world. We really cannot allow inordinately high rates to spoil the party.