November CPI inflation moderates to 5.48% on low base effect

16 Dec 2024 , 09:57 AM

NOVEMBER INFLATION MODERATES AFTER OCTOBER HIGH

After touching a 14-month high level of 6.21% in October 2024; CPI inflation was is back at 5.48% in November 2024. That is where inflation was in September. Even prior to the data announcement, Bloomberg consensus estimate had pegged consumer inflation in November at well under 5.5%. The actually November 2024 CPI inflation at 5.48% was largely in line with the street expectations. There are two points to note here. Firstly, the lower inflation is largely on account of the base effect. Base year inflation between October 2023 and November 2023 was sharply up from 4.87% to 5.55%. This largely explains the fall in yoy headline inflation in November 2024. Secondly, the 183 bps fall in food inflation in November 2024 is also largely on account of the base effect wherein the food inflation had gone up from 6.61% to 8.70% between October and November 2023. One broad concern is that the core inflation remains elevated around the 3.70%, at par with previous month.

FOOD INFLATION MODERATES; CORE INFLATION FLAT

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 (%)
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%	3.14%	5.08%
Jul-24	5.42%	3.39%	3.60%
Aug-24	5.66%	3.40%	3.65%
Sep-24	9.24%	3.51%	5.49%
Oct-24	10.87%	3.70%	6.21%
Nov-24	9.04%	3.70%	5.48%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key takeaways from the table above.

• As we mentioned earlier, the sharp fall in the headline inflation in November 2024 was largely due to the spike in headline inflation in the year ago period of November 2023. This is almost in sync with the way food inflation in November 2024 has also been driven lower by the base effect.
• Let us talk about food inflation first. For November 2024, food inflation came in at 9.04%; which is 183 bps higher than the food inflation in October 2024. If you compare with the average food inflation of the last 12 months at 8.47%, the November 2024 food inflation is still 57 bps higher. This is despite the moderation in vegetable prices.
• We will not spend too much time on energy inflation due to its regulated nature. In November 2024, core inflation remained steady at 3.70%. In fact, core inflation has been consistently edging higher since May 2024. That can be attributed to trade disruptions due to West Asia tensions and the post-COVID supply disruptions normalizing. Average core inflation in last 12 months stood at 3.47%; so, November 2024 is still higher.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.00%, November 2024 headline inflation is still higher at 5.48%. However, the one big swing factor for CPI inflation in India has been the food prices; although we need to look at without the base effect. The combination of Kharif coming to mandis and a good Rabi crop give hopes of food inflation moderating in the coming months.

Let us now break up the non-food and the food inflation into rural and urban inflation to understand where is the trigger for inflation shifts coming from.

NON-FOOD INFLATION: URBAN STORY VERSUS RURAL STORY

Let us first look at the macro picture of rural and urban inflation. Between October 2024 and November 2024, the headline inflation moderated from 6.21% to 5.48%. During this period, headline rural inflation fell from 6.68% to 5.95%, while headline urban inflation also fell from 5.62% to 4.83%. What about the break-up of food inflation? Between October 2024 and November 2024, the food inflation moderated from 10.87% to 9.04%. However, rural food inflation fell from 10.69% to 9.10%, while urban food inflation also fell from 11.09% to 8.74%. Food inflation appears to have considerably moderate in urban India in Nov-24.

Non-Food Basket	Non-Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Clothing	6.32	2.88	2.76	2.83
Footwear	1.04	1.90	2.57	2.14
Clothing and footwear	7.36	2.74	2.74	2.75
Housing	–	–	2.87	2.87
Fuel and light	7.94	-0.88	-3.53	-1.83
Household goods and services	3.75	2.42	3.31	2.82
Healthcare	6.83	3.86	4.19	4.01
Transport and communication	7.60	2.85	2.41	2.64
Recreation and amusement	1.37	2.61	2.68	2.65
Education	3.46	3.67	4.10	3.89
Personal care and effects	4.25	10.34	10.54	10.42
Miscellaneous	27.26	4.33	4.24	4.26

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 -1.83%, the urban inflation stands at -3.53% while rural inflation is -0.88%. Even the transport and communication inflation is higher in rural areas at 2.85% compared to 2.41% in urban India. However, rural inflation has been lower in items like footwear, household goods, healthcare, and personal care & effects. It is rural India that is scoring much better on the core inflation basket.

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 November 2024 was no exception. The food basket is also broken into rural and urban inflation to assess the granular impact.

Food Basket	Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Cereals and products	12.35	7.20	6.13	6.88
Meat and fish	4.38	4.74	4.64	4.67
Egg	0.49	4.67	5.08	4.84
Milk and products	7.72	2.74	3.02	2.85
Oils and fats	4.21	14.88	10.27	13.28
Fruits	2.88	9.22	6.08	7.68
Vegetables	7.46	30.02	28.13	29.33
Pulses and products	2.95	5.72	4.83	5.41
Sugar and Confectionery	1.70	1.08	1.76	1.31
Spices	3.11	-7.93	-6.42	-7.43
Non-alcoholic beverages	1.37	2.31	3.43	2.72
Prepared meals	5.56	3.51	4.46	3.95
Food Basket	47.25	9.10	8.74	9.04

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 November 2024 was marginally lower at 6.88%. The rural cereals inflation at 7.20% was sharply higher than the urban cereals inflation at 6.13% for November 2024; largely on account of lower cereals output in last Kharif season.
• Let us turn to high protein inflation. Overall protein inflation has sobered in November 2024 for milk; continuing the trend. Even meat products inflation is lower for October 2024. The fall in high protein inflation has been sharper in rural areas.
• What about the all-important vegetables and fruits? After reporting 35.99% in September and 42.18% in October; vegetables inflation moderated to 29.33% in November 2024. While fruits inflation remains subdued at 7.68%, it is vegetables inflation that has been the real swing factor in food inflation
• What about pulses and spices inflation? The overall pulses inflation for November 2024 has come down sharply from 7.43% to 5.41%; moderating 400 bps in 2 months. However, rural pulses inflation remains sharply higher. Spices inflation dipped further into negative from -7.01% to -7.43%; with rural spices inflation sharply higher than urban spices inflation.

If the vegetables basket is ignored, overall inflation would be just about 3.9%, which is well within the RBI mandate. Clearly, vegetables continues to be the big problem area for RBI.

DO WE SEE RATE CUT CHANCES IN FEBRUARY 2025?

These are early days and it may not help much to second-guess what the RBI will do. After the RBI maintained status quo in December, it looks like there may be a pause in February 2025 also. Possibly, the CRR may be cut by another 50 bps to handle liquidity shortages, but rate cuts amidst 5.48% inflation looks tough. RBI would be worried about two things. Firstly, the fall in inflation in November is largely on account of the base effect and it needs to be seen how inflation behaves shorn of the base effect. Also, core inflation remains sticky at 3.7% and the RBI may prefer much lower levels before a rate cut.

One hint from the RBI has been that India has to live with a new normal for rates, which is higher than the previous normal. So, 135 bps higher repo rates may be par for the course. RBI may want to avoid a situation where inflation spikes and it does not have enough choices on hand. Of course, that is a choice that the new RBI Governor, Sanjay Malhotra has to make!