October CPI inflation spikes to 14-month high of 6.21%

14 Nov 2024 , 11:05 AM

OCTOBER 2024 INFLATION AT 14-MONTH HIGH

If the September 2024 CPI inflation was a shocker at 5.49%, the October inflation was a lot worse. Even prior to the data announcement, the Bloomberg consensus estimate had pegged consumer inflation in October 2024 at closer to 5.9%. However, the actual CPI inflation for October 2024 came in sharply higher at 6.21%. There are two points to note. Firstly, you really cannot blame it on the base year. Base year inflation between September 2023 and October 2023 was only down marginally from 5.02% to 4.87%. This is largely to do with the current situation only. Secondly, the spike in CPI inflation has been duet to a combination of food inflation and core inflation in October. While food inflation surged from 9.24% to 10.97% in October 2024, the MOM core inflation also went up from 3.51% to 3.70%. Ther is also a structural sticky element to consumer inflation in October 2024.

OCTOBER FOOD INFLATION SPIKES; CORE INFLATION SPIKES TOO

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 (%)
Oct-23	6.61%	4.26%	4.87%
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%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key takeaways from the table above.

• As we mentioned earlier, the base effect only captures part of the spike in Inflation. The spike to 6.21% in October 2024 is largely on account of a sharp spike in food inflation and core inflation.
• Let us talk about food inflation first. For October 2024, food inflation came in at 10.87%; which is 163 bps higher than the food inflation in September 2024. If you compare with the average food inflation of the last 12 months at 8.12%, the October 2024 inflation is 275 bps higher. The spike in food inflation was most prominent in vegetables.
• We will not spend too much time on energy inflation due to its regulated nature. In October 2024, core inflation was up from 3.51% to 3.70%. In fact, core inflation has been consistently edging higher since May 2024. That can be attributed to higher costs of trade disruptions as well as the post-COVID supply disruptions normalizing. Average core inflation in last 12 months stood at 3.52%; so, October is higher than annual average.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 4.88%, October 2024 headline inflation is sharply higher at 6.21%. However, the one big swing factor for CPI inflation in India has been the food prices and that could hold the key to inflation. The good news is that reservoir levels are above 86%, which promises good Rabi output. However, rains have been too erratic in recent times.

One of the stories has been that rural India was bearing the brunt of higher inflation but now rural demand may pick up? Is that really the case?

NON-FOOD INFLATION: HOW URBAN AND RURAL BASKETS STACKED UP

Let us first look at the macro picture of rural and urban inflation. Between September 2024 and October 2024, the headline inflation went up from 5.49% to 6.21%. During this period, headline rural inflation went up from 5.87% to 6.68%, while headline urban inflation went up from 5.05% to 5.62%. What about the break-up of food inflation? Between September 2024 and October 2024, the food inflation went up from 9.24% to 10.87%. However, rural food inflation went up from 9.08% to 10.69%, while urban food inflation spiked sharply from 9.56% to 11.09%. In the last 2 months, food has hit urban inflation a lot harder.

Non-Food Basket	Non-Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Clothing	6.32	2.79	2.71	2.79
Footwear	1.04	1.79	2.70	2.15
Clothing and footwear	7.36	2.64	2.75	2.70
Housing	–	–	2.81	2.81
Fuel and light	7.94	-0.60	-3.36	-1.61
Household goods and services	3.75	2.26	3.20	2.65
Healthcare	6.83	3.76	4.37	3.96
Transport and communication	7.60	2.86	2.54	2.71
Recreation and amusement	1.37	2.38	2.50	2.48
Education	3.46	3.84	3.99	3.95
Personal care and effects	4.25	10.75	11.33	10.99
Miscellaneous	27.26	4.40	4.31	4.32

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 -1.61%, the urban inflation stands at -3.36% while rural inflation is -0.60%. Even the transport and communication inflation is higher in rural areas at 2.86% compared to 2.54% in urban India. However, rural inflation has been lower in items like footwear, household goods, healthcare, and personal care & effects. In short, 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 October 2024 was no different. 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	7.27	6.19	6.94
Meat and fish	4.38	3.02	3.41	3.17
Egg	0.49	4.75	5.02	4.87
Milk and products	7.72	2.81	3.13	2.97
Oils and fats	4.21	10.91	7.07	9.51
Fruits	2.88	10.06	6.69	8.43
Vegetables	7.46	41.94	42.63	42.18
Pulses and products	2.95	7.61	7.05	7.43
Sugar and Confectionery	1.70	2.50	2.54	2.57
Spices	3.11	-7.64	-5.70	-7.01
Non-alcoholic beverages	1.37	2.43	3.20	2.73
Prepared meals	5.56	3.10	4.32	3.65
Food Basket	47.25	10.69	11.09	10.87

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 October 2024 was about 10 bps higher at 6.94%. The rural cereals inflation at 7.27% was higher than the urban cereals inflation at 6.19% for October 2024; largely on account of lower cereals output in the last Kharif season.
• Let us turn to high protein inflation. Overall protein inflation has sobered in October 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, a positive sign.
• What about the all-important vegetables and fruits? After reporting 10.71% in August 2024, the vegetable inflation had spiked to 35.99% in September and has spiked further to 42.18% in October 2024. The spike in vegetables prices was caused by the erratic late monsoons and the supply chain constraints faced in recent months.
• What about pulses and spices inflation? The overall pulses inflation for October 2024 has come down sharply from 9.81% to 7.43%; with rural pulses inflation relatively higher. Spices inflation dipper further into negative from -6.13% to -7.01%; with rural spices inflation sharply lower than urban spices inflation.

If you were to look at one item within the food basket that has almost spiked uncontrollably; it is vegetables inflation and to a lesser extent, fruits inflation. Now, what does that mean for the RBI rate action?

ARE RATE CUTS IN DECEMBER 2024 OFF THE AGENDA?

These are early days and it may not help much to second-guess what the RBI will do. However, it now looks almost certain that the RBI will not cut rates in December 2024. In the October minutes, most of the members had expressed apprehensions that inflation could spike. That has manifested in the last two readings of September and October.

One can argue that the real rates of interest are still high and that the repo rates are a good 135 bps above the pre-pandemic rates. However, the fact of the matter is that the RBI really has not incentive to cut rates when inflation is steeply high and there are no real concerns on the growth front. For the RBI the choice is quite obvious.

It is not just the food inflation, but even core inflation has spiked in October. RBI would not want to risk letting inflation off the hook with loose monetary policies. Most likely, one can safely assume that rate cuts by the RBI are now put off to February 2025 or, perhaps, even beyond that point!