September 2023 CPI inflation falls to 5.02%, as food inflation eases

13 Oct 2023 , 11:34 AM

Consumer inflation offers a breather

To an extent, you can call the month of September 2023 the first time that the inflation spike of the last 3 months was reversed. In July 2023 the headline inflation had touched a high of 7.44% before tapering to 6.83% in August 2023. However, headline inflation had still remained above the RBI outer comfort limit of 6%. In the month of September 2023, the headline inflation has further fallen to 5.02%, now well within the RBI comfort zone. One can argue that this is still higher than the 4% target of the RBI, but that would be too much to expect. The spike in inflation in the last two months was driven by food prices and it is these very food prices that have tempered in the month of September. Just to give an example, the food inflation is down from 9.94% in August 2023 to 6.56% in September 2023. To top it, even core inflation has fallen to 4.5%, the lowest in the last one year.

However, it may still be too early to celebrate. The food prices are down as the supply chain bottlenecks have been addressed to an extent. Also, the acreage has been better in the current year, despite the weak monsoons. However, the big X-factor could be oil prices. For now, the OMCs are absorbing the impact of higher crude prices, but that cannot continue for ever. Once the impact is passed on to consumers, it would show up on inflation. The oil risks are high due to the worsening geopolitical situation in the Middle East and West Asia. Remember, oil is not just about commodity inflation. For India it is about imported inflation as well as about the strong externalities since higher oil prices seeps in the form of higher inflation in other commodities and services too.

September CPI inflation was way lower than street estimates

Inflation started to get the better of street estimates in the month of August itself. For instance, in August 2023 inflation was not only lower than July inflation, but also lower than the Reuters consensus estimate of 7%. Similarly, in September, the headline inflation fell by 181 basis points from 6.83% to 5.02%. More importantly ,the September headline inflation at 5.02% was sharply lower than the Reuters estimate of 5.50%. So, for two months in succession, the rate of inflation has not only been lower than the previous month, but also lower than the consensus expectations of economists. That is encouraging.

However, this cannot gloss over three key inflation risks that the Indian economy is still exposed to. Firstly, the lower food inflation is on the assumption that the Kharif output would hit the mandis on time and the Rabi would continue to flatter. The Kharif has started coming to the mandis, but we have to still await the Rabi output, especially considering that it has been a year of deficit rainfall overall. Secondly, oil prices are still not fully reflected in consumer prices since the end prices are still regulated. In addition, there is also the big risk of imported inflation at a time when the geopolitical situation is worsening in the Middle East and West Asia. Thirdly, the 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. Short term inflation may have been contained, but the battle is far from over.

CPI Inflation falls by 181 bps in September 2023

The month of May 2023 was one of the best months for the inflation reading. Headline inflation had touched 4.25%; the lowest level in 25 months. Things changed a lot in just 2 months with CPI inflation touching a 15-month high of 7.44% in July and still staying well above the RBI outer comfort zone at 6.83% in August 2023. September 2023 has seen the headline inflation down at 5.02% with food inflation also down sharply at 6.5%. However, food inflation is sharply higher than the average of the six months prior to July.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Sep-22	8.60%	6.10%	7.41%
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%

Data Source: MOSPI & Ministry of Finance Estimates

Back in April 2022, inflation had made a temporary peak at 7.79%. Since then, the rate of CPI inflation had fallen steadily from 7.79% to 4.25% over the next 13 months. However, the delayed monsoons, followed by deluges in certain parts of India proved a double whammy. However, quick intervention by the government in managing supply and a natural tapering of core inflation has helped inflation to come down. There are still uncertainties in the form of volatile oil prices and the uncertain Rabi output. The good news is that, as of September 2023, the headline inflation is now just about 102 bps away from the eventual RBI target.

Inflation in many of the food items tapered in August 2023 and further in September 2023. However, some of the key items continue to see high inflation in absolute terms. For the month of September 2023, inflation in spices stood at 23.06%, pulses at 16.38%l, and cereals at 10.95%. That is an outcome of impact on spices output in South and the lower foodgrain production. Milk inflation at 6.89%, Eggs inflation at 6.42% and fruits inflation at 7.30% still remain high in absolute terms. Most of the sobering in inflation has come from vegetables inflation tapering to 3.39% and inflation in oils and fats dipping into negative zone at -14.04%. The moral of the story is that, but for the sharp fall in inflation in vegetables and oil & fats, the actual food inflation for September 2023 could have been much higher than 6.56%.

Urban and rural inflation came down in September 2023

The good news is that inflation has fallen in September across rural and urban centres. For example, headline inflation has fallen from 6.83% to 5.02% between August and September 2023. In this same period, rural inflation fell from 7.02% to 5.33% while urban inflation fell from 6.59% to 4.65%. Let us turn to the food basket. The food inflation overall fell from 9.94% to 6.56% between August and September 2023. In this period, the rural food inflation fell from 9.67% to 6.65% while the urban food inflation fell from 10.42% to 6.35%. The impact has been uniform; with rural and urban India experiencing lower food and headline inflation.

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 September 2023 was at 10.95%. However, rural cereals inflation at 11.36% was much higher than urban cereals inflation at 9.95%. 

   

• Let us now turn to milk inflation. The overall milk inflation for September 2023 was at 6.89%. However, rural milk inflation at 7.02% was higher than urban milk inflation at about 6.70%.

   

• What about the all-important vegetables inflation? The overall vegetables inflation for September 2023 was sharply lower at 3.39%. However, rural vegetables inflation at 4.18% was much higher than urban vegetables inflation at 2.13%.

   

• What about pulses inflation? The overall pulses inflation for September 2023 was at 16.38%. However, rural pulses inflation at 15.44% was lower than urban pulses inflation at 18.26%.

   

• Finally, if you look at spices, then the overall spices inflation for September 2023 is at 23.06%. However, rural spices inflation at 23.71% is higher than urban spices inflation which stands at 21.85%.

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 than in the urban centres. Core inflation has trended lower at 4.5%, but that is largely helped along the way by some constriction in consumer demand.

Will September inflation call an end to rate hikes?

The October RBI policy marked the fourth consecutive policy that the repo rates have been held at 6.5%. In the last two months, there were concerns that the RBI may be inclined to hike rates in the light of the sharp spike in consumer inflation. However, with the latest inflation reading coming in at 5.02%, the RBI may not be overtly bothered about the inflation monster. At least, inflation is not such a pressing concern that the RBI would have to hike rates. Does this mean the end of rate hikes? This would predicate on 4 key factors in the months ahead.

1. Firstly, the components of inflation would hold the key. As long as food inflation and core inflation stay in check, the RBI has little incentive to raise rates from current levels. There is already a sense of tightness in the credit markets so even without rate hikes, there is some tightening that is happening. RBI would only worry if the inflation shoots up sharply.

    

2. On the growth front, the latest reading for August showed IIP growth spiking to a 14-month high of 10.3%. That has positive ramifications for GDP growth and RBI would prefer to keep interest rates at current levels to ensure that cost of funds do not become a hindrance in the path of economic growth.

    

3. Thirdly, a lot will still predicate on the global front and here there are many open areas. Firstly, the US Fed and other major central banks are not done with rate hikes yet, so hawkishness is still the name of the game. In addition, the rising tensions in the Middle East / West Asia as well as the economic slowdown in China would continue to weight on the central bank while crystallizing its rate policy.

    

4. Fourthly, the rupee value will also play a role. The weak rupee tends to import a lot of inflation and if higher rates are needed to make the rupee stronger, then the RBI may eventually choose to bite the bullet and hike rates.

For now, the most likely scenario is somewhat akin to what is happening in the US Fed. The RBI may not be in a hurry to hike rates, but will ensure that rates are held at elevated levels for a longer period of time. Remember, the repo rates are already 135 bps above the pre-COVID rates, so we are already more hawkish that we were in normal times. Also, the RBI has ruled out rate cuts in the near future and that guidance would continue to be reiterated for now. Unless there is an emergency, it looks like rate hikes are off the discussion table at the RBI for the time being.