May-24 CPI inflation edges lower to 4.75%, despite lower base

14 Jun 2024 , 11:21 AM

MAY 2024 INFLATION AT 4.75%; LOWER THAN EXPECTATIONS

Since December 2023, headline consumer inflation (CPI) in India has been on a steady downward path. From a high level of 5.69%, the CPI inflation has gradually tapered to 4.75% in May. This also marks the third month in a row that consumer inflation has been  under 5% mark. For the month of May, the CPI inflation was not only lower sequentially, but also came in much lower than estimates. For May 2024, the Bloomberg survey of economists had projected the consumer headline inflation in the range of 4.90% to 5.00%. The actual headline inflation at 4.75%, came in much lower due to a sharper than expected fall in core inflation and almost flat food inflation. The economists were estimating flat core inflation and higher food inflation. Food inflation edged lower from 8.70% to 8.69% in May 2024, while the core inflation fell sharply from 3.20% to 2.97% in May 2024. However, if you look at yoy comparison of inflation components, then food inflation is sharply up and core inflation is sharply down, although the inflation is higher by just 50 bps.

Would this set the tone for a rate cut by the RBI? We will come back to that later, but suffice to say that at the current juncture, the RBI and the Finance Ministry would have 3 concerns on the inflation front. Firstly, the headline inflation is still a good 75 basis points above the RBI inflation target of 4%. Clearly, the central bank is facing a challenge handling last-mile inflation. Secondly, the IMD has projected a normal monsoons this year, but the actual Kharif output is a function of quantum of rainfall, spread and timely arrival. Hence even if the rains are normal (96% to 104% of LPA), food inflation may continue to be sticky. Lastly, core inflation has already fallen to 2.97% and some it can be attributed to reduced spending. However, structurally, the core inflation does not have much further room to go down and may, at best, plateau at these levels.

MAY INFLATION STORY : FOOD PRICES FLAT, CORE INFLATION 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. The table has 13 months data.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
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%	3.30%	4.85%
Apr-24	8.70%	3.20%	4.83%
May-24	8.69%	2.97%	4.75%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key takeaways from the table above.

• Let us talk about food inflation first. For May 2024, food inflation is flat at 8.69%. At 8.69%, the food inflation for May 2024 is 82 basis points higher than the average food inflation of the previous 12 months. Also, key items in the food basket like pulses and vegetables have been experiencing double digit inflation for almost a year now.
• Let us turn to fuel inflation. The fuel inflation tapered in May 2024 on a yoy basis. However, the lower fuel inflation can be attributed to the controlled prices of petrol and diesel. Also, the numbers are yoy and the base of last year is slightly distorting the picture. For now, the immediate risk of an oil price shock caused by the Red Sea crisis appears to be diminishing as supplies are likely to normalize by year-end. Urban fuel inflation is sharply lower than rural fuel inflation.
• Let us turn to core inflation, which has been the saving grace in the last few months. In fact, for May 2024, lower core inflation offset the flat food inflation. For May 2024, the core inflation is 23 bps lower compared to April 2024 at 2.97%. More importantly, the core inflation has fallen sharply by 205 basis points in the last one year. 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; which is what is causing maximum inflation related stress. However, these gains may be saturating.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.36%, the May 2024 headline inflation is lower at 4.75%. However, the one big swing factor for CPI inflation in India has been the food prices and that could hold the key to inflation. This year, the Met Department has predicted normal rainfall, but in the inflation story; there is many a slip between the cup and the lip.

Let us first look at the granular break-up of the non-food inflation basket.

NON-FOOD INFLATION STRESS MORE ACUTE IN RURAL INDIA

In the past, we had noted on several occasions that the food inflation stress had been much higher in rural India than in urban India. However, in May 2024, the food inflation comparison is fairly OK and it is non-food inflation (especially fuel, lighting, transport, and communications) that is putting more pressure on rural households. However, that is more because fuel & light inflation is much lower in urban India than in rural India. For the month of May 2024, the headline inflation was lower at 4.75%, compared to 4.83% in April 2024, while food inflation was almost flat at 8.69%. Let us look at how the rural and urban inflation numbers resonate. Headline inflation is 8 bps lower at 4.75% in May 2024.

In this same period, urban inflation has risen from 4.11% to 4.15% while rural inflation has fallen from 5.43% in March to 5.28% in  May 2024. However, overall inflation in rural areas continues to be at a higher level. In May 2024, the food inflation saw an increase across rural and urban households. For instance, food inflation overall fell marginally from 8.70% to 8.69% in May 2024. In this period, the rural food inflation has fallen from 8.75% to 8.62% while urban food inflation has risen from 8.56% to 8.83%. Food inflation continues to be high in rural and urban India, but it is in fuel inflation that urban India has an edge.

The table below captures the non-food comparison of rural and urban inflation.

Food Basket	Non-Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Clothing	6.32	2.77	2.98	2.83
Footwear	1.04	1.65	2.91	2.11
Clothing and footwear	7.36	2.57	3.01	2.74
Housing	–	–	2.56	2.56
Fuel and light	7.94	-1.32	-8.02	-3.83
Household goods and services	3.75	2.28	2.76	2.51
Health	6.83	4.15	4.34	4.20
Transport and communication	7.60	1.24	0.69	0.97
Recreation and amusement	1.37	2.70	2.36	2.51
Education	3.46	3.66	4.35	4.07
Personal care and effects	4.25	7.46	8.08	7.72
Miscellaneous	27.26	3.57	3.32	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 -3.83%, the urban inflation stands at -8.02% while rural inflation is -1.32%. Even the transport and communication inflation is sharply higher in rural areas at 1.24% compared to 0.69% in urban India. While rural inflation has been lower in some of the non-food items, it is the pressure from fuel & lighting as well as transport and communication that has brought about this fairly deep dichotomy between rural and urban inflation.

PULSES, VEGETABLES CONTINUE TO HAUNT FOOD INFLATION

Food basket with a weightage of 47.25% continues to be the swing factor for inflation since mid-2023. That trend has continued in 2024 also. The food basket is broken into rural and urban inflation and inflation impact is captured for each item, with weights for clarity.

Food Basket	Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Cereals and products	12.35	8.95	8.19	8.69
Meat and fish	4.38	7.09	7.70	7.28
Egg	0.49	8.13	6.90	7.62
Milk and products	7.72	2.51	2.73	2.62
Oils and fats	4.21	-7.39	-5.60	-6.71
Fruits	2.88	6.86	6.54	6.68
Vegetables	7.46	28.24	25.84	27.33
Pulses and products	2.95	16.47	18.54	17.14
Sugar and Confectionery	1.70	5.74	5.72	5.70
Spices	3.11	3.71	5.52	4.27
Non-alcoholic beverages	1.37	2.07	2.95	2.42
Prepared meals	5.56	2.88	3.95	3.35
Food Basket	47.25	8.62	8.83	8.69

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 May 2024 was 6 bps higher at 8.69%. The rural cereals inflation at 8.95% was higher than the urban cereals inflation at 8.19% for May 2024; largely on account of lower cereals output last season.
• Let us turn to high protein inflation. Overall protein inflation has gone up slightly in May for milk and eggs. Even meat products inflation is up for the month of May 2024. This has key implications for diet quality and nourishment.
• What about the all-important vegetables and fruits? In May 2024, the vegetables inflation was still elevated at 27.33%, compared to 27.80% in April 2024. In the case of fruits, rural inflation is slightly higher than urban inflation.
• What about pulses inflation? The overall pulses inflation for May 2024 has bounced back to 17.14%, compared to 16.84% in April 2024. However, rural pulses inflation continues to be sharply lower than urban pulses inflation.
• Finally, if you look at spices, then the overall spices inflation for May 2024 is sharply lower at 4.27%; down from 7.50% in April and 11.40% in March 2024. Rural spices inflation is sharply lower than urban spices inflation.

The month has seen some flattening of food inflation on hopes that year 2024 may be a year of normal rains. At least, that is what the early guidance from the IMD says!

HOW STATE-WISE INFLATION DIVERGED IN MAY 2024

While the national average CPI inflation has been 4.75%, the rural inflation is much higher at 5.28%, compared to just 4.15% for urban India. Here is the state-wise inflation story.

• On the upside, Odisha at 6.25%, Karnataka at 6.11%, Telangana at 5.97%, Andhra Pradesh at 5.87%, Kerala at 5.47%, Bihar at 5.43%, and Haryana at 5.35% were some of the stand-out cases of higher than national-average inflation.
• On the downside, Delhi at 1.99%, Uttarakhand at 3.37%, West Bengal at 3.40%, Himachal Pradesh at 3.58%, and Jharkhand at 3.83% were some of the states that reported headline inflation that were much lower than the national average.
• In terms of rural inflation stress; Karnataka, Odisha, and Andhra Pradesh reported highest rural inflation, while Delhi, Maharashtra and Uttarakhand had lowest rural inflation. In the case of urban inflation; Telangana, Rajasthan and Odisha were on top while Delhi, Himachal Pradesh and Jammu & Kashmir were at the bottom.

Out of the 22 states, 12 states reported above 5% inflation, which could be attributed to a surge in election related spending.

RBI MUST NOT LOSE OUT ON PRE-EMPTIVE RATE CUTS NOW

Will lower inflation and modest IIP growth trigger rate cuts by the RBI, earlier than expected? Well, the elections are over, the new government has been formed and only the full budget is to be presented in July. Does this open up the gates for the RBI to cut rates in its August policy? There could be several reasons for the RBI to seriously look at a rate cut. Firstly, the undertone of the MPC tilt is shifting with 2 of the 6 members voting for 25 bps rate cut. Also, the latest quarter shows stress on company financials due to higher cost of funds. But, there are more compelling reasons for a rate cut at this juncture.

The rates have been held static since February 2023 and are still 135 bps above the pre-COVID levels. Above all, with bond yields at above 7% and CPI inflation at 4.75%; the real rates are at an incredibly high level of 2.25%. The actual real rate should be closer to 1%, as it has been in the past, giving substantial leeway to the RBI to cut rates. Agreed, that the global situation may be in a state of flux and the domestic uncertainties are just about ending. However, this is the time for the RBI to make a pre-emptive attack on rates. In February 2023, the RBI was the first major central bank to call a halt to rate hikes. That has proved to be a good move in retrospect. It is now time to shift gears towards rate cuts; and the sooner the better!