September CPI inflation spikes to 5.49% on food price surge

15 Oct 2024 , 11:32 AM

SEPTEMBER 2024 INFLATION SURGES SHARPLY TO 5.49%

To be fair, the spike in inflation in September was not entirely unexpected. Most of the consensus estimates of economists, research houses and the news agencies had pegged consumer inflation for September in the range of 5.50% to 5.70%. There were two reasons for the same. Firstly, the corresponding base year had seen a sharp fall in food inflation and headline inflation which would anyways have spiked the yoy inflation for September. Secondly, the month of September 2024 had seen a sharp spike in the prices of vegetables, which had already raised the spectre of higher food inflation. Therefore, the food inflation in September surging to 9.24% and the headline inflation surging to 5.49% was not exactly a matter of surprise. That was largely along expected lines.

What possibly disappointed the street was that the inflation had spiked in September 2024 to 5.49%, after reported 3.54% and 3.65% in the previous two months. In July 2024, Inflation touched a 5-year low in India while in September, the inflation has come in at a 9-month high. It is this dichotomy that has actually disappointed the street. In India, no discussion on consumer inflation is complete without dwelling on food inflation, since it comprises about 47.5% of the overall consumer inflation basket. Let us look at how the food inflation panned out with reference to the base month details. Between the months of August and September 2024, the food inflation went up from 5.66% to 9.24%. However, that is not too worrisome if you consider the fact that the base had seen food inflation move down 338 bps from 9.94% to 6.56%. What does this mean for headline inflation. Between the months of August and September 2024, the headline inflation went up from 3.65% to 5.49%. However, that is not too worrisome if you consider the fact that the base had seen food inflation move down 181 bps from 6.83% to 5.02%. One can say that the sharp spike in food inflation and headline inflation in September 2024 has been largely explained by the base effect.

TUTORIAL DETOUR: WHY CORE INFLATION MATTERS?

If you look at the overall Indian CPI basket, there are three parts to it viz., food inflation, fuel inflation, and core inflation. The core inflation is the residual inflation that is left in the inflation basket after the food and fuel items are removed from the overall basket. The core inflation is a critical measure for a number of reasons. Firstly, the core inflation is relatively stable over longer periods of time. Hence, it is a more secular measures of how the prices are panning out. Secondly, this core inflation also tends to be relatively sticky, in that bring down core inflation is much tougher than bringing down food and fuel inflation. Being structural in nature, there are limits to what can be achieved in terms of core inflation management through regulatory means. Thirdly, core inflation is a good proxy for the underlying cost of manufacturing. It is when core inflation is falling rapidly that you see Indian companies actually enjoying the benefits of lower cost of funds and wider profit margins. Core inflation for September 2024 stood at 3.5%, 10 bps higher than August.

SEPTEMBER FOOD INFLATION SPIKES; CORE INFLATION BOTTOMS OUT

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 (%)
Aug-23	9.94%	4.79%	6.83%
Sep-23	6.56%	4.52%	5.02%
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%	3.50%	5.49%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key takeaways from the table above.

• Before we start off on inflation basket, a quick word on the base effect. The CPI inflation is yoy inflation so it is vulnerable to the base effect. As we have already seen earlier in our discussion, the spike in headline inflation in September 2024 can be largely explained by the base effect, especially the impact of the base effect on food inflation. The base effect is not too relevant in the area of core inflation, as it follows a more structural path and is less prone to periodic fluctuations.
• Let us talk about food inflation first. For September 2024, food inflation came in at 9.24%; which is 358 bps higher than the food inflation in August 2024. If you compare with the average food inflation of the last 12 months at 8.05%, the September 2024 inflation is 119 bps higher. The spike in food inflation was across categories, but most prominent in the vegetables segment.
• We will not spend too much time on energy inflation due to its regulated nature, but suffice to say that it went deeper into the negative during the month of September 2024 on the back of a sharp fall in crude prices. That probably saved the day for headline inflation. In July 2024, core inflation was up from 3.14% to 3.39%. After a flat core inflation in August, it has again spiked to 3.50% in September 2024. That can be attributed to the higher implicit costs of trade disruptions and post-COVID supply disruptions normalizing. Thanks to the geopolitical risks in West Asia and the trade disruptions, it looks like core inflation may have bottomed. The average core inflation in the last 12 months stood at 3.70%.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.00%, the September 2024 headline inflation is sharply higher at 5.49%. However, the one big swing factor for CPI inflation in India has been the food prices and that could hold the key to inflation. A lot will depend on whether the Kharif output hitting the market is able to tame the monster of food inflation. That will hold the key.

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 August 2024 and September 2024, the headline inflation went up from 3.65% to 5.49%. If you break up this headline inflation further; then during the same period, the headline rural inflation went up from 4.16% to 5.87%, while the headline urban inflation went up from 3.14% to 5.05%. In short the spike in headline inflation has been distributed across rural and urban households. What about the rural and urban break-down of food inflation?

Between August 2024 and September 2024, the food inflation went up from 5.66% to 9.24%. If you break up this food inflation further; then during the same period, the rural food inflation went up from 6.02% to 9.08%, while the urban food inflation went up from 4.99% to 9.56%. In short the spike in food inflation has been a lot more acute among the urban households as compared to the rural households.

Non-Food Basket	Non-Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Clothing	6.32	2.69	3.00	2.80
Footwear	1.04	1.58	2.64	1.98
Clothing and footwear	7.36	2.54	2.92	2.71
Housing	–	–	2.78	2.78
Fuel and light	7.94	-0.33	-3.25	-1.39
Household goods and services	3.75	2.15	3.09	2.55
Healthcare	6.83	3.94	4.38	4.09
Transport and communication	7.60	2.92	2.54	2.77
Recreation and amusement	1.37	2.22	2.45	2.31
Education	3.46	3.62	3.94	3.79
Personal care and effects	4.25	8.81	9.30	9.00
Miscellaneous	27.26	4.07	4.09	4.05

Data Source: MOSPI & Ministry of Finance Estimates

Let us first focus on the non-food basket and the break up into rural and urban inflation. 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 -1.39%, the urban inflation stands at -3.25% while rural inflation is -0.33%. Even the transport and communication inflation is higher in rural areas at 2.92% compared to 2.54% in urban India. However, rural inflation has been lower in items like clothing, 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 September 2024 was no different. The food basket is broken into rural and urban inflation to capture the granular impact.

Food Basket	Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Cereals and products	12.35	7.11	6.34	6.84
Meat and fish	4.38	2.66	2.59	2.66
Egg	0.49	6.55	5.97	6.31
Milk and products	7.72	2.81	3.30	3.03
Oils and fats	4.21	2.98	1.58	2.47
Fruits	2.88	8.35	6.79	7.65
Vegetables	7.46	36.04	35.88	35.99
Pulses and products	2.95	9.79	9.80	9.81
Sugar and Confectionery	1.70	3.48	3.50	3.46
Spices	3.11	-6.78	-4.79	-6.13
Non-alcoholic beverages	1.37	2.33	3.03	2.57
Prepared meals	5.56	2.95	4.29	3.56
Food Basket	47.25	9.08	9.56	9.24

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 September 2024 was about 47 bps lower at 6.84%. The rural cereals inflation at 7.11% was higher than the urban cereals inflation at 6.34% for September 2024; largely on account of lower cereals output last season. However, with good monsoons this year, cereals inflation is tapering.
• Let us turn to high protein inflation. Overall protein inflation has sobered in August 2024 for milk; continuing the trend of June 2024. Even meat products inflation is lower for August 2024. The fall in high protein inflation has been much sharper in rural areas, which is a good sign. However, egg prices continue to remain high.
• What about the all-important vegetables and fruits? After reporting 10.71% in August 2024, the vegetable inflation has literally spiked to at 35.99% in September. While rural vegetables inflation was at 36.04%, urban vegetables inflation was at 35.88%. In fact, the spike is much sharper in case of urban inflation.
• What about pulses inflation? The overall pulses inflation for September 2024 has come down sharply from 13.6% to 9.81%. In terms of actionable items, the rural pulses inflation and the urban pulses inflation are almost at par with one another.
• Finally, if you look at spices, then the overall spices inflation for September 2024 has dipped further into negative at -6.13%. This compares favourably with data for the previous months. Rural spices inflation is sharply lower than urban spices inflation.

If July and August were dream months with headline inflation under 4%; the month of September 2024 was a return to reality. September saw a sharp hardening of the food inflation and a 10 bps rise in core inflation too. It looks like the base effect, but the sharp spike in vegetables prices is far from comforting.

HOW STATE-WISE INFLATION DIVERGED IN SEPTEMBER 2024

While the national average CPI inflation was 5.49% in September 2024, the rural inflation is much higher at 5.87%, compared to just 5.05% for urban India. Here is the state-wise inflation.

• On the upside, Bihar at 7.50%, Chhattisgarh at 7.36%, Uttar Pradesh at 6.74%, Odisha at 6.56%, Haryana at 6.20%, and Gujarat at 6.05% were some of the stand-out cases of higher than national-average inflation.
• On the downside, Delhi at 3.67%, West Bengal at 4.27%, Telangana at 4.40%, Himachal Pradesh at 4.59%, and Uttarakhand at 4.67% were some of the states that reported headline inflation much lower than the national average.
• In terms of rural inflation; Chhattisgarh, Bihar, Uttar Pradesh, Odisha, Haryana, and Madhya Pradesh reported highest rural inflation, while Delhi, West Bengal, Uttarakhand, Telangana, and Himachal Pradesh reported lowest rural inflation. In the case of urban inflation; Bihar Gujarat, Chhattisgarh, Jharkhand, and Punjab were at the top while Delhi, Jammu & Kashmir, Telangana, Himachal Pradesh, and West Bengal were at the bottom of the list.

Out of the 22 states, 14 states reported above 5% inflation, and 21 states reported above 4% inflation, which can be attributed to the high base effect.

WHEN WILL RBI CUT RATES – DECEMBER 2024 OR FEBRUARY 2025?

The RBI had opted to hold status quo on rates in the latest October policy. Although the RBI MPC did shift the stance of the policy to neutral; that was more about the liquidity situation and less about rates. Here are a few thoughts.

• Headline inflation was under the RBI target of 4% for 2 months in a row. Just when we thought that the Indian economy would undershoot the RBI target of 4.5% inflation; the September reading has spiked to 5.49%. This may delay rate cut decision.
• The Fed has already cut rates by 50 bps on September 18, 2024; but it promises to cut rates by another 50 bps by December 2024 and an additional 100 bps by end of 2025. That would be a lot of monetary divergence for RBI to deal with.
• There were 2 recent growth metrics that should worry the policymakers. Core sector contracted by -1.77% in August 2024 and IIP by -0.14% in the same month. Clearly, capex needs a big push, and for that borrowing rates have to come down sharply.
• India is in a monetary sweet spot. The repo rates at 6.50% are 135 bps above the pre-COVID rates of 5.15%. Also, the real rates of interest in India are still high at 2% and lower costs will be a boon for corporates in reducing cost of funds.

Logically, we would have expected the RBI to cut rates in December 2024. However, with this spike in inflation, the RBI has one more reason to be cautious. It may demand more data points to justify a rate cut from here. We could well see the rate cut decision, now, being put off to the February 2025 monetary policy!