Apr-24 CPI inflation tapers to 4.83%, but food prices higher

15 May 2024 , 10:49 AM

For the month of April 2024, the Bloomberg survey of economists had projected the consumer headline inflation in the range of 4.80% to 4.85%. The estimate was almost on target as the headline CPI inflation for April 2024 came in at 4.83%. After falling by 5 bps in the previous month, the headline inflation fell by another 2 bps in April 2024.  If you break up the inflation number, this lower than expected inflation was triggered by lower fuel inflation and lower core inflation, even as food inflation actually increased in April 2024. Food inflation actually edged up from 8.52% to 8.70% in April, while the core inflation tapered further from 3.30% to 3.20% in the month of April 2024.

At the current juncture, the RBI and the Finance Ministry would have 3 concerns on the inflation front. Firstly, the headline inflation is still a good 83 basis points above the RBI inflation target of 4%. The problem is similar in the US also, but the last mile inflation is proving to be tough. Secondly, with the ongoing heat wave across India, the RBI would be wary of any spike in food inflation, since it could get accentuated by a weaker than expected monsoon this year. Lastly, further gains from core inflation may be limited as the supply chain story has largely played out and global trade is up against some serious headwinds.

APRIL INFLATION: FOOD EDGES UP, CORE INFLATION TAPERS

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 below captures data of headline inflation, core inflation and food inflation over the last 13 months.

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
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%
Nov-23	8.70%	4.10%	5.55%
Dec-23	9.53%	3.89%	5.69%
Jan-24	8.30%	3.60%	5.10%
Feb-24	8.66%	3.30%	5.09%
Mar-24	8.52%	3.30%	4.85%
Apr-24	8.70%	3.20%	4.83%

Data Source: MOSPI & Ministry of Finance Estimates

Here are some key takeaways from the table above.

• Let us talk about food inflation first. For April 2024, food inflation is 18 basis points higher at 8.70%. At 8.70%, the food inflation for March 2024 is nearly 220 basis points higher than the average food inflation of the last 12 months. Also, key items in the food basket like pulses and vegetables have been experiencing double digit inflation for a better part of the last one year.
• Let us turn to fuel inflation. The fuel inflation tapered in April 2024 on a yoy basis. However, the lower fuel inflation can be attributed to the controlled prices of petrol and diesel. Also, the numbers are yoy and the base of last year is slightly distorting the picture. For now, the immediate risk of an oil price shock caused by the Red Sea crisis appears to be diminishing as abundant US supplies appear to be moderating markets.
• Let us turn to core inflation, which has been the saving grace in the last few months. In fact, for April 2024, lower core inflation offset the elevated levels of food inflation. For April 2024, the core inflation is 10 bps lower compared to March 2024 at 3.2%. More importantly, the core inflation has fallen sharply by nearly 200 basis points in the last one year. Core inflation is already well below the RBI target rate of 4% inflation, so the primary focus of the RBI and the government continues to be in handling the food inflation. However, further tapering support from core inflation may be limited.
• Finally, let us come to headline inflation. Compared to the average of the previous 12 months at 5.40%, the April 2024 headline inflation is lower at 4.83%. However, the one big swing factor for CPI inflation in India has been the food prices and that could hold the key to inflation, if the monsoons get delayed this year too. The heat wave is already suggesting that the monsoon could be below par.

The month of April 2024 saw flat inflation, although higher food inflation remains a concern. Withing the food basket, key items like cereals, pulses and vegetables continue to stay at elevated levels, despite the supply side efforts of the Indian government.

NON-FOOD INFLATION STRESS MORE ACUTE IN RURAL INDIA

In the past, we had noted on several occasions that the food inflation stress had been much higher in rural India than in urban India. However, in April 2024, the food inflation comparison is fairly OK and it is non-food inflation (especially fuel, lighting, transport, and communications) that is putting more pressure on rural households. For the month of April 2024, the headline inflation was tad lower at 4.83%, compared to 4.85% in March 2024, with food inflation trending higher but core inflation, and fuel inflation trending lower. Let us look at how the rural and urban inflation numbers resonate. Headline inflation is 2 bps lower at 4.83% in April 2024. In this same period, urban inflation has fallen from 4.14% to 4.11% while rural inflation has fallen from 5.51% in March to 5.43% in April 2024. In April 2024, the food inflation saw an increase across rural and urban households. For instance, food inflation overall went up from 8.52% in March 2024 to 8.70% in April 2024. In this period, the rural food inflation has risen from 8.55% to 8.75% while urban food inflation has also risen from 8.41% to 8.56%.

Let us look at how the non-food inflation items for rural and urban households compare?

Food Basket	Non-Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Clothing	6.32	2.88	2.87	2.89
Footwear	1.04	2.03	3.04	2.40
Clothing and footwear	7.36	2.79	2.96	2.85
Housing	-	-	2.68	2.68
Fuel and light	7.94	-1.27	-9.12	-4.24
Household goods and services	3.75	2.57	2.83	2.69
Health	6.83	4.11	4.52	4.27
Transport and communication	7.60	1.42	0.81	1.09
Recreation and amusement	1.37	2.83	2.49	2.64
Education	3.46	4.07	4.36	4.20
Personal care and effects	4.25	7.13	7.81	7.45
Miscellaneous	27.26	3.63	3.45	3.54

Data Source: MOSPI & Ministry of Finance Estimates

Where is the overall pressure on rural inflation coming from. One of the major items where there is a huge gap is fuel and lighting. In this case, while the overall inflation is -4.24%, the urban inflation stands at -9.12% while rural inflation is just -1.27%. Even the transport and communication inflation is sharply higher in rural areas compared to urban areas. While rural inflation has been lower in many of the other items, it is the pressure from fuel & lighting as well as transport and communication that has brought about this huge dichotomy between rural and urban inflation.

WHAT WE READ FROM THE FOOD BASKET IN APRIL 2024

Food basket with a weightage of 47.25% continues to be the swing factor for inflation since mid-2023. That trend has continued in 2024 also. The food basket is broken into rural and urban inflation and inflation impact is captured for each item, with weights for clarity.

Food Basket	Food Weights	Rural Inflation	Urban Inflation	Headline Inflation
Cereals and products	12.35	8.94	8.07	8.63
Meat and fish	4.38	7.78	8.94	8.17
Egg	0.49	7.27	6.79	7.08
Milk and products	7.72	3.03	2.91	2.97
Oils and fats	4.21	-10.14	-8.18	-9.43
Fruits	2.88	5.18	5.25	5.22
Vegetables	7.46	29.48	25.24	27.80
Pulses and products	2.95	16.15	18.03	16.84
Sugar and Confectionery	1.70	6.06	5.77	5.94
Spices	3.11	7.56	8.13	7.75
Non-alcoholic beverages	1.37	2.24	3.08	2.60
Prepared meals	5.56	2.99	4.01	3.46
Food Basket	47.25	8.75	8.56	8.70

Data Source: MOSPI & Ministry of Finance Estimates

Here are the key items in the inflation basket across rural and urban segments. For all individual food items and for totals, previous month data is in adjacent brackets.

• Let us start with cereals inflation. The overall cereals inflation for April 2024 was higher at 8.63%. The rural cereals inflation and the urban cereals inflation were both at elevated levels in March 2024, due to lower Rabi output this year.
• Let us turn to high protein inflation. Overall protein inflation has gone up slightly in April for milk and eggs. Even meat products inflation has surged in the month of April 2024. This has key implications for diet quality and nourishment.
• What about the all-important vegetables and fruits? In April 2024, the vegetables inflation showed signs of tapering as it fell from 28.34% to 27.80% over in April over March 2024. In the case of fruits, rural inflation is slightly lower than urban inflation.
• What about pulses inflation? The overall pulses inflation for April 2024 has trended lower to 16.84% compared to 17.71% in March 2024. However, rural pulses inflation continues to be lower than urban pulses inflation.
• Finally, if you look at spices, then the overall spices inflation for April 2024 is sharply lower at 7.50%; compared to 11.40% in March and 13.51% in February 2024. It is down 600 bps in last 2 months. Rural spices inflation is lower than urban spices inflation.

Inflation still has some bark left in it. Whether it also has the bite; we will only know after the monsoons in 2024.

HOW STATE-WISE INFLATION DIVERGED IN APRIL 2024

The national headline inflation stood at 4.83%, but some states were substantially above the national average, while some were well below the average.

• On the upside, Odisha at 7.11%, Assam at 5.70%, Chhattisgarh at 5.70%, Telangana at 5.68%, Haryana at 5.65%, Andhra Pradesh at 5.59%, and Uttar Pradesh at 5.53% were some of the stand-out cases of higher than national-average inflation.
• On the downside, Delhi at 2.17%, West Bengal at 3.49%, Uttarakhand at 3.61%, Maharashtra at 3.69%, and Jharkhand at 3.97% were some of the states that reported headline inflation that were much lower than the national average.

Out of the 22 states, 12 states reported above 5% inflation, which could be attributed to a surge in election related spending.

RBI COULD SURPRISE WITH RATE CUT; BUT NOT FOR NOW

Will lower inflation and modest IIP growth trigger rate cuts by the RBI, earlier than expected? Will the RBI try to be pre-emptive in rate cuts. Here are a few thoughts on the subject.

1. The RBI has a history of being proactive and pre-emptive on several occasions in the past. For instance, in February 2023, the RBI surprised the street by halting rate hikes and has held on to that rate since. Hence, a rate cut is possible if the government and the RBI believe that a rate cut could boost GDP growth in a big way.
2. This is an election year and the RBI does not want to be early to cut rates and then realizing that it was translating into higher inflation. As has been the experience in the recent past, higher inflation caused by lower rates is hard to control. However, the RBI is likely to crystallize its thinking once there is greater clarity on the outcome of elections and also on the monsoons front.
3. If one were to draw from the experience of the US, it is still holding on to 2 rate cuts while the markets are expecting pre-emptive rate cuts. Even in the case of US, inflation continues to be sticky, but the Fed is expected to go ahead with rate cuts in September 2024 on the assumption that inflation was on target.
4. However, RBI is known to surprise the market; like when it halted rate hikes in February 2023. The move was criticized at that time, but in retrospect it has helped the Indian economy to grow at around 8% in FY24. That is an option the RBI could be evaluating.

However, the first major decision is likely to happen after the election outcome is known, a new government is formed, the full budget is passed and there is greater clarity on the monsoons this year. The RBI may prefer to wait and watch till then.