March 2024 CPI inflation falls to 4.85%, fuel index heads lower

13 Apr 2024 , 02:33 PM

MARCH 2024 INFLATION AT 4.85%; LOWER THAN EXPECTED

The Bloomberg survey of economists, ahead of the inflation data, had projected the consumer headline inflation at 4.90%. Unlike the last 2 months when the Bloomberg estimates were precise to the “T”, the March 2024 inflation came in 5 bps lower than the consensus estimate at 4.85%.  If you break up the inflation number, this lower than expected inflation was triggered by a marginal tapering in food inflation and core inflation, but a sharp fall in energy inflation. It is best to be a tad cautious, though food inflation trended lower from 8.66% to 8.52%, while core inflation tapered 10 bps from 3.3% to 3.2%.

However, the real trigger for lower consumer inflation in March 2024 came from lower energy inflation. This can be attributed to the ₹2/litre cut in prices of petrol and diesel ahead of the elections. That has helped to keep the overall inflation in check. At the current juncture, the RBI may have two concerns. Firstly, the headline inflation is still a good 85 basis points above the RBI inflation target of 4%. That is still better than the 150 bps gap in the US. Secondly, while core inflation has been suppressed by the normalization of supply chains, these gains may be peaking. This was the lowest inflation reading in 10 months.

MARCH 2024 INFLATION: FOOD LOWER, CORE INFLATION ALSO TAPERS

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 below captures data of headline inflation, core inflation and food inflation over the last 13 months.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
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%
Feb-24	8.66%	3.30%	5.09%
Mar-24	8.52%	3.20%	4.85%

Data Source: MOSPI & Ministry of Finance Estimates

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

• Let us talk about food inflation first. For March 2024, food inflation is 14 basis points lower at 8.52%. There was some sobering seen in vegetables, fruits, and pulses as well as the high protein items like meat and eggs. At 8.52%, the food inflation for March 2024 is nearly 200 basis points higher than the average food inflation of the last 12 months.
• Let us turn to fuel inflation. The fuel inflation also tapered in March 2024 on a yoy basis. However, the sharp impact on fuel prices had less to do with the tapering of crude price and more to do with the OMCs (oil marketing companies) cutting the prices of diesel and petrol by ₹2 per litre. That has a potentially strong primary and secondary impact on the inflation narrative.
• Let us turn to core inflation, which has been the saving grace in the last few months. Inf act, for March 2024, lower core inflation offset the still elevated levels of food inflation. For March 2024, the core inflation is 10 bps lower compared to January 2024 and a full 69 bps lower than December 2023. In fact, if you look at the core inflation since March 2023, it is down a good 275 basis points from 5.95% to just about 3.20%. Core inflation is already well below the RBI target rate of 4% inflation, so the primary focus of the RBI and the government continues to be in handling the food inflation.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.39%, the March 2024 headline inflation is lower at 4.85%. The average inflation has hovered closer to 5.40% since June 2023 and the current level of headline inflation is well below that.

The month of March 2024 saw tapering of inflation, across baskets. Core inflation continues to trend lower, albeit marginally, even as food inflation also sobered. Fuel inflation impact is more because of the recent prices cuts in petrol and diesel.

FOOD INFLATION STRESS MORE ACUTE IN RURAL INDIA

In the past, we have noted on several occasions that the food inflation stress has been much higher in rural India than in urban India. That has been the case in March 2024 also. For the month of March 2024, the headline inflation was flat at 4.85%, compared to 5.09% in February 2024, with core inflation, food inflation and fuel inflation trending lower. Let us look at how the rural and urban inflation numbers resonate. Headline inflation is 24 bps lower at 4.85% in March 2024. In this same period, urban inflation has fallen from 4.78% to 4.14% while rural inflation has actually risen from 5.34% in February to 5.45% in March 2024. This rural spike in inflation was led by food prices. For instance, food inflation overall reduced from 8.66% in February 2024 to 8.52% in March 2024. In this period, the rural food inflation has risen from 8.27% to 8.61% while urban food inflation has fallen sharply from 9.19% to 8.35%. In short, had the rural food inflation been contained, then the headline inflation reading for March 2024 could have been much lower than 4.85%.

WHAT WE READ FROM THE FOOD BASKET IN MARCH 2024

Food basket with a weightage of 39% (post the weightage cut) has been the swing factor for inflation in the second half of 2023 and that has continued in 2024. The food basket is broken into rural and urban inflation and price impact is captured for each item.

Food Products	Rural Inflation in (%)	Urban Inflation in (%)	Headline Inflation in (%)
Cereals and products	8.61	7.90	8.37 (7.60)
Meat and fish	6.14	6.83	6.36 (5.21)
Egg	10.87	9.49	10.33 (10.69)
Milk and products	3.50	3.20	3.38 (3.86)
Oils and fats	-12.60	-10.16	-11.72 (-13.97)
Fruits	3.41	2.67	3.07 (4.83)
Vegetables	29.60	26.38	28.34 (30.25)
Pulses and products	17.07	18.99	17.71 (18.90)
Sugar and Confectionery	7.47	6.73	7.25 (7.48)
Spices	11.41	11.43	11.40 (13.51)
Non-alcoholic beverages	2.53	3.21	2.79 (2.97)
Prepared meals, snacks.	3.16	4.07	3.58 (3.69)
Consumer Food Inflation	8.61 (8.21)	8.35 (9.19)	8.52 (8.66)

Data Source: MOSPI & Ministry of Finance Estimates

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

• Let us start with cereals inflation. The overall cereals inflation for March 2024 was sharply higher at 8.37%. The rural cereals inflation and the urban cereals inflation were both at elevated levels in March 2024, due to lower Rabi output this year.
• Let us turn to high protein inflation. Overall protein inflation has come down in February for milk and eggs, while the meat products inflation has shown visible signs of surging in the month of March 2024.
• What about the all-important vegetables and fruits? In March 2024, the vegetables inflation showed signs of tapering as it fell from 30.25% to 28.34% over in March over February 2024. The impact has been more acute in the rural areas. This is true of fruits also, where rural stress is more visible.
• What about pulses inflation? The overall pulses inflation for March 2024 has trended lower to 17.71% compared to 18.90% in February 2024. However, rural pulses inflation continues to be lower than urban pulses inflation.
• Finally, if you look at spices, then the overall spices inflation for March 2024 is sharply lower at 11.40% compared to 13.51% in the previous month, as supplies stabilize. It is down 500 bps in last 2 months. Rural and urban spices inflation continue to remain in double-digits.

There are some pressure points visible but the good news is that the cut in the prices of petrol and diesel by ₹2 per litre has taken the sting away from inflation. Now inflation appears to have more bark than bite, which is a much safer position to be in.

IS FALLING CORE INFLATION SUSTAINABLE FOR LONGER?

Core inflation has continued to be on a downtrend in the last few months. If you look at the last one year, core inflation has come down from a relatively intransigent level of 5.95% to the current level of 3.20%; that is a full 275 bps lower. Now, core inflation has dipped below the RBI comfort zone of 4% for headline inflation. That gives more room for volatility in food and fuel. However, there is a bigger tale in the way core inflation has come down and that has a lot to do with the supply chain constraints automatically reversing.

In the aftermath of the pandemic, the demand picked up rapidly but supplies failed to keep pace, resulting in runaway inflation and hawkish central bank policies. However, now the supplies are picking up at a rapid pace and that is resolving the core inflation problem. Core inflation is the residual inflation in the price basket after eliminating food and fuel. It includes clothing, footwear, housing, medical expenses, and entertainment. However, there is a strong aspect of core inflation that is influenced by crude prices and that is a risk factor.

HOW STATE-WISE INFLATION DIVERGED IN MARCH 2024

The national headline inflation stood at 4.85%, but some states were substantially above the national average, while some were well below the average.

• On the upside, Odisha at 7.05%, Assam at 6.08%, Haryana at 6.06%, Bihar at 5.71%, Telangana at 5.60%, Uttar Pradesh at 5.49%, and Jharkhand at 5.47% were some of the stand-out cases of higher than national-average inflation.
• On the downside, Delhi at 2.29%, Uttarakhand at 3.58%, Maharashtra at 3.66%, and West Bengal at 3.68% were some of the states that reported headline inflation that were much lower than the national average.

It seems to be a case of Odisha continuing to experience highest inflation while Delhi faced the lower inflation in March 2024; a trend quite evident in recent months.

WILL THE RBI SURPRISE WITH AN EARLY RATE CUT?

Will lower inflation and modest IIP growth trigger rate cuts by the RBI, much earlier than expected? If one reads through the March monetary policy statement we can infer a few points from the RBI silence on the matter of rate cuts in 2024.

1. Firstly, RBI would still prefer a situation where food inflation is on a secular downtrend; or at least more predictable. Since June 2023, food has been the major driver of headline inflation, even as core inflation has been tapering. The RBI may hold on rate cuts, till there is clarity on the food inflation front.
2. This is an election year and the RBI does not want to be early to cut rates and then realizing that it was translating into higher inflation. As has been the experience in the recent past, higher inflation caused by lower rates is hard to control. That may offset 2 year of good work done by the RBI.
3. Recent data flows from the US have hinted at higher inflation and that has back-ended rate cut expectations. The RBI may not want to risk monetary divergence at this stage, especially when the lower inflation in March has been purely driven by the price cuts on diesel and petrol. That may not be sustainable amidst rising Brent crude prices.
4. However, RBI is known to surprise the market; like when it halted rate hikes in February 2023. The move was criticized at that time, but in retrospect it has helped the Indian economy to grow at around 8% in FY24. That is an option the RBI could be evaluating.

The RBI would most likely wait for the full budget to be presented in July 2024. However, there is a strong likelihood that RBI may not wait till the Fed cuts rates. The RBI may do a token rate cut of 25 bps to test waters. That would not be hard to comprehend, especially if we consider the elevated real interest rates in India as well as repo being decisively above pre-COVID levels. That may be an interesting area to watch out for.