October 2023 CPI inflation tapers to 4.87%, on lower core inflation

15 Nov 2023 , 10:06 AM

October 2023 inflation tapers by another 15 bps

Since touching a recent high of 7.44% in July 2023, the inflation has fallen sharply. In fact, the inflation has progressive fallen from 7.44% in July 2023 to 6.83% in August 2023 and further to 5.02% in September 2023. In the current inflation reading for October 2023, the consumer inflation has fallen further by 15 bps to 4.87%. what is more gratifying is that for the second month in a row, the consumer inflation has been under the RBI outer limit of 6%, which is a positive. 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. However, the lessons of May and June would not be lost. 

In the month of May 2023, the consumer inflation had touched a low of 4.25%, just about 25 bps short of the 4% target. However, then came the report of insufficient rains and the likely impact on Kharif output. The situation was worsened by erratic rainfall, which also impacted the logistics flow of agri output. The net result was a spike in inflation from 4.25% in May 2023 to a whopping 7.44% in July 2023. Hence, this time around the RBI and the markets would be more measured in their enthusiasm and optimism about the future trajectory of inflation. But there is a bigger trend visible in this month; on core inflation.

Good news on the core inflation front

Core inflation has been a big concern for the policymakers and the RBI in the recent past. Now, core inflation is 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. Now, why is this core inflation so important? But, first the trend. For a  long time, India had managed to bring food inflation and fuel inflation under control, but core inflation had continued to remain sticky. Globally, core inflation is that portion of the inflation that is sticky and structural in nature. 

If you look at the trend in India, core inflation in the last one year is down from 6.10% to 4.20%. That is a sharp fall in core inflation in a short span of time. However, it must be noted that even as food inflation and fuel inflation were displaying volatility, the core inflation was continuously trending lower. In the latest month, the fall in overall CPI inflation from 5.02% to 4.87% has been triggered by a sharp fall in core inflation, even as food inflation is marginally higher on a MOM basis. The good news for the policymakers and the markets is that the economy may be getting to grips with the stickiest aspect of consumer inflation.

October 2023 inflation above street estimates

CPI inflation (consumer inflation) in October 2023 at 4.87% may be lower than 5.02% in September, but the actual inflation was higher than street estimates. The consensus estimates had pegged consumer inflation for October at 4.80%, but the eventual number turned out to be about 7 bps higher. That is more because, food inflation came in higher than expected at 6.61% and was largely driven by a surprising spike in cereals, pulses, and spices. This is a slight shift because in August and September 2023, the CPI inflation was not only lower sequentially but it was also lower than the consensus street estimates. Higher food inflation in October 2023 was driven by cereals, pulses, and spices. This has 3 major implications for the inflation reading in the coming months.

Firstly, the lower food inflation in the last few months was on the assumption that Kharif output would hit mandis on time and the Rabi would continue to flatter. The Kharif has started coming to mandis, but Rabi output still remains uncertain. Secondly, it is surprising that even after all these months, the pressure on cereals and pulses is not going away in a hurry. These were the two segments that were hit by the erratic Kharif output this year. Thirdly, WPI inflation was in negative zone for 5 months and that is now expected to get back into positive territory. That will also have a lag effect on CPI inflation. 

CPI inflation; from Magic May to Optimistic October 

The month of May 2023 was one of the best months for inflation in recent memory. Headline inflation touched a 25-month low of 4.25%; and voila, the CPI inflation was just about bps away from the 4% target. The sub-par monsoons followed by erratic monsoons and storms changed the narrative drastically. By July 2023, CPI inflation had touched a 15-month high of 7.44% and was already perilously outside the RBI upper comfort zone. However, inflation has sobered from 7.44% in July 2023 to a more acceptable 4.87% in October 2023. However, one must not lose sight of the base effect. October 2022 inflation stood at elevated levels of 6.77% and the fall in later months is likely to push up inflation again in the coming months. We have to wait and watch!

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Oct-22	7.01%	5.90%	6.77%
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%

Data Source: MOSPI & Ministry of Finance Estimates

Even as food inflation remained sticky in October 2023, the big news is on the core inflation front, which has fallen by nearly 30 bps MOM to 4.20%. Core inflation or structural inflation is down nearly 190 bps in the last 1 year and that is the real good news as it indicates that the lower inflation is sustainable. Here is a quick take on the food inflation basket.

• The big drivers of inflation were the food crops like cereals, pulses, and spices. While cereals inflation stood at 10.65%, pulses inflation was 18.79% and spices inflation was elevated at 22.76%. There were the big inflation drivers for the month.

   

• 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 9.30% while milk inflation also is elevated at 6.44%.

   

• On the supply dependent products in the basket, oils & fats saw negative inflation of -13.73% while vegetables inflation tapered to 2.70% as things have largely normalized. However, fruits inflation remained elevated at 9.34%.

Most of the pressure came from the Urban food basket

Inflation has fallen in October across urban and rural centres, but it food inflation in urban centres has spiked sharply. This could be an outcome of a revival in urban demand amidst the ongoing festive season. For example, headline inflation has fallen from 5.02% to 4.87% between September and October 2023. In this same period, urban inflation fell marginally from 4.65% to 4.62% while rural inflation was fell sharply from 5.33% to 5.12%. Let us turn to the food basket. The food inflation overall fell from 6.62% (revised up from 6.56%) to 6.61% between September and October 2023. In this period, the rural food inflation fell from 6.71% to 6.58% while the urban food inflation surprisingly spiked from 6.35% to 6.63%. 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 October 2023 was at 10.65%. However, rural cereals inflation at 11.05% was much higher than urban cereals inflation at 9.80%. 

   

• Let us now turn to milk inflation. The overall milk inflation for October 2023 was at 6.44%. However, rural milk inflation at 6.32% was lower than urban milk inflation at about 6.55%.

   

• What about the all-important vegetables inflation? The overall vegetables inflation for October 2023 was sharply lower at 2.70%. However, rural vegetables inflation at 2.98% was much higher than urban vegetables inflation at 2.30%.

   

• What about pulses inflation? The overall pulses inflation for October 2023 was higher at 18.79%. However, rural pulses inflation at 17.68% was sharply lower than urban pulses inflation at 21.07%.

   

• Finally, if you look at spices, then the overall spices inflation for October 2023 is at 22.76%. However, rural spices inflation at 23.36% is higher than urban spices inflation which stands at 21.54%.

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. Core inflation has trended lower at 4.2%, but that is largely helped along the way by weakness in consumer demand.

Will October inflation convince RBI to call off rate hikes?

The October RBI policy marked the fourth consecutive policy that the 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, it was a brave decision but it proved to be on the right track. In the last 3 months, the consumer inflation has decisively come down from 7.44% to 4.87%. For now, it looks like the RBI may not be overtly bothered about the inflation monster. At least, inflation is not such a pressing concern to justify hiking rates. Will the RBI officially call off rate hikes after the latest inflation reading? This would predicate on 3 key factors.

1. Firstly, the components of inflation would hold the key. 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 for longer. That is what the Fed calls “Higher for Longer.” There is already a sense of tightness in the credit markets so even without rate hikes, there is tightening happening in some form. RBI will worry if core inflation shoots up from here.

    

2. In the last 4 months, the core sector growth has stayed above 8% and the IIP has shown strong positive traction on the back of manufacturing output growth. That has positive ramifications for GDP growth and quite obviously, the RBI would prefer to keep interest rates at current levels rather than upset the growth applecart. There has been pressure on the RBI to ensure cost of funds do not become a show spoiler.

    

3. Finally, the only 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. Also, what the euphoria of May 2023 taught the RBI is that a few swallows do not a summer make. It has to keep its options wide open.

For now, the simplest answer looks like 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. With repo rates 135 bps above pre-COVID rates, we are already substantially hawkish from the baseline. At the same time, the RBI would want to keep its hawkish options open and play its cards close to its chest. That strategy worked for RBI in the past. Rate hikes are off the table, but RBI is not calling off rate hikes any time soon.