November 2023 CPI inflation bounces to 5.55%, as food prices surge

13 Dec 2023 , 09:12 AM

November inflation surges 68 bps to 5.55%

To begin with, there is some good new and, not so good news. The not so good news is that the inflation for November 2023 has come in sharply higher at 5.55% as compared to 4.87% in October 2023. The real situation is, however, not all that bad. The street estimate for November inflation was 5.7%, so the actual inflation for November 2023 at 5.55% was about 15 bps lower. Also, this marks the third month in a row that the headline inflation has remained under the RBI outer comfort limit of 6%. Also, compared to the recent peak of 7.44% in July this year, the November inflation is still substantially lower.

The good news is that inflation has been progressively coming down in the last few months. From 7.44% in July 2023, the inflation has progressively fallen from to 6.83% in August 2023, 5.02% in September 2023, and further to 4.87% in October 2023. In comparison, the November inflation is 68 bps higher at 5.55%, largely led higher by food inflation, even as fuel inflation and core inflation continue to be in check. Of course, the government and the RBI would be keenly observing how quickly the consumer inflation in India now gets to the target of 4% eventual target. Headline inflation has bounced back from 4.25% in May and from 4.87% in October. 

How the inflation break-up looks like

The headline inflation is broadly divided into food inflation, fuel inflation and core inflation. In fact, core inflation is the residual inflation after food and fuel are removed from the calculations. The table below captures the time series data of headline inflation, core inflation and food inflation over the last 13 months.

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

Data Source: MOSPI & Ministry of Finance Estimates

If you look at the table above, it is the sharp 209 bps spike in food inflation from 6.61% to 8.70% that has been responsible for the spike in headline inflation. Otherwise, fuel inflation and core inflation are lower in November. It must be noted here that much of the food inflation pressure in November has come from urban India as compared to rural India. So, while rural food inflation still remains at 8.38%, the urban food inflation has spiked to 9.28%, so even the food inflation number of 8.70% hides a fairly sharp rural-urban dichotomy. However, the real reason for the spike in food inflation is more serious.

Kharif output in 2023 was impacted by lower output on the back of erratic rainfall. In fact, the drought conditions in the early part of monsoons were followed by flood situations in some parts of the country. The net result was that not just was the output impacted, but even the logistics of bringing foodgrains and other crops to the Mandis was impacted. In addition, the later part of the monsoon season was also erratic and that has had an impact on the rabi output or the winter output. While Rabi sowing has been delayed, the winter output is also impacted by the lower water levels in the reservoirs. In short, it is a kind of double whammy for agriculture and that is also evident in the Q2 agricultural growth.

Deciphering the food basket for November 2023

It is OK to say that food inflation is at 8.7%, but what is more important is which heads of food basket have actually driven this food inflation. That food basket, in the table below is broken up into rural and urban inflation and the price impact is captured for all the key headers in the food basket.

Food  Products	Rural Inflation  in (%)	Urban Inflation  in (%)	Headline Inflation  in (%)
Cereals and products	10.72	9.38	10.27
Meat and fish	1.79	2.86	2.15
Egg	5.66	6.28	5.90
Milk and products	5.75	5.80	5.75
Oils and fats	-16.13	-12.94	-15.03
Fruits	9.74	12.30	10.95
Vegetables	16.49	19.66	17.70
Pulses and products	19.21	22.34	20.23
Sugar and Confectionery	6.75	6.16	6.55
Spices	21.97	20.62	21.55
Non-alcoholic beverages	3.06	4.26	3.58
Prepared meals, snacks.	3.64	4.94	4.22
Consumer Food Inflation	8.38	9.28	8.70

Data Source: MOSPI & Ministry of Finance Estimates

Even as food inflation turned sticky in November 2023, the break-up of the food inflation basket throws up some interesting insights. In the food basket, there are items like cereals, pulses, and spices, where the inflation is a direct outcome of the quantum of supply and output. Then there are the cyclical products like vegetables and fruits, that tend to be the most vulnerable to temporary spikes in demand and supply including logistics support. Finally,  there are the high nutrition products like milk, eggs, and fish, which are generally demand and lifestyle driven. Here are some quick takeaways.

• The cropping products like cereals, spices and pulses are under a lot of inflation pressure. All the three items are facing double digit inflation with pulses and spices facing inflation of over 20%.

   

• One basket that is closely watched for its nutritional value is the high protein items. Under this header, the inflation in eggs continues to be elevated at 5.90% while milk inflation also is elevated at 5.30%.

   

• It is the inflation in vegetables and fruits that has really spiked in the last one month and which has been the reason for the spike in food inflation. Edible oils are the only major category in the food basket to still witness negative inflation due to imported surpluses.

The food basket is showing a lot of strain and that is evident in the sharp spike in food inflation by 209 basis points across the board.

Why lower core inflation is a cause for celebration

In the last one year, core inflation has come down from a relatively intransigent level of 6.1% to the current level of 4.1%. Core inflation has for long been a major concern for the policymakers. First, a word on core inflation. It is popularly also called residual inflation and it is what is left of inflation basket after removing food and fuel. In short, all the other products like clothing, footwear, housing, medical expenses, entertainment etc would be classified as the core products basket. Why exactly is this core inflation so important? 

Core inflation tends to be more structural in nature and hence tweaking demand and supply normally does not help. In the Survey of Indian Economy presented by the government in 2022, it had clearly emphasized the need to focus on core inflation rather than on the headline inflation from a policy perspective. After years of the core inflation being above the 5% mark, we have finally seen the core inflation tapering to 4.1%, one of the lowest levels in recent memory. Much of the core inflation in the last few years was due to the supply chain constraints created in the aftermath of the COVID pandemic. That impact appears to be gradually receding now.

How the urban and rural inflation numbers compare?

Inflation has risen in November across urban and rural centres, but the food inflation in urban centres has spiked sharply; a trend almost similar to the previous month. Even in the latest month, the headline inflation has risen from 4.87% to 5.55%, but the core inflation has trended lower from 4.20% to 4.10%. Let us now look at how the rural and urban inflation numbers compare. For example, headline inflation has risen from 4.87% to 5.55% between October 2023 and November 2023. In this same period, urban inflation has risen from 4.62% to 5.26% while rural inflation has also increased from 5.12% to 5.85%. Let us turn to the food basket. The food inflation overall has risen from 6.61% to 8.70% between October and November 2023. In this period, the rural food inflation has grown from 6.63% to 8.38% while the urban food inflation surprisingly spiked from 6.63% to 9.28%. In short, most of the pressure has come from the urban food basket this month.

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 November 2023 was slightly lower at 10.27%. However, rural cereals inflation at 10.72% was much higher than urban cereals inflation at 9.38%. 

   

• Let us now turn to milk inflation. The overall milk inflation for November 2023 was lower at 5.75%. However, rural milk inflation at 5.75% was marginally lower than urban milk inflation at about 5.80%.

   

• What about the all-important vegetables inflation? The overall vegetables inflation for November 2023 was sharply higher at 17.70%. However, rural vegetables inflation at 16.49% was much lower than urban vegetables inflation at 19.66%.

   

• What about pulses inflation? The overall pulses inflation for November 2023 was higher at 20.23%. However, rural pulses inflation at 19.21% was sharply lower than urban pulses inflation at 22.34%.

   

• Finally, if you look at spices, then the overall spices inflation for November 2023 is at 21.55%. However, rural spices inflation at 21.97% is higher than urban spices inflation which stands at 20.62%.

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. However, fuel inflation is much higher in the rural areas while it is contracting in urban centres. Transport inflation is also higher in the rural areas compared to the urban centres. However, when it comes to health and personal care products, rural India is facing lower levels of inflation. 

Does higher inflation trigger rate hikes by the RBI?

The December RBI policy marked the fifth consecutive policy that repo rates have been held at 6.5%. In recent months, when consumer inflation spiked to 7.44%, there were concerns that the RBI would be inclined to hike rates. However, RBI took a call that the spike in inflation was temporary and hence rate action was not needed. In retrospect, that was a brave decision, but also the right decision. For now, despite the recent spike, inflation is not such a pressing concern to justify hiking rates. However, there are 2 factors that could play a key role in this decision. 

1. As long as food inflation and core inflation are in control, RBI would not be too inclined to hike rates from current levels. Instead, it may choose to err on the side of caution and just hold rates at elevated levels. There is already a sense of tightness in the credit markets and the RBI has just tightened the screws on consumer lending recently.

    

2. The only plausible reason the RBI may not officially call an end to rate hikes is the fluid and volatile global situation. In the recent past, we have seen the global 10 year bond yields spiking and the dollar index also sharply higher. The RBI would like to be prepared for such a scenario. RBI realizes from its May lessons that it must still keep its options wide open.

The best that the RBI will do now is a pause for longer than expected period. The RBI may not be in a hurry to hike rates, but will ensure rates are held at elevated levels for longer time to avoid any inflation creeping back into the economy. Let us not forget that the repo rates are 135 bps above the pre-COVID rates, we are already substantially hawkish from the baseline. However, the RBI would want to keep its hawkish options open and play its cards close to its chest. It looks like RBI rate hikes may be off the table, but calling off rate hikes may not happen in the near future.