MARCH 2024 INFLATION AT 4.85%; LOWER THAN EXPECTED
The Bloomberg survey of economists, ahead of the inflation data, had projected the consumer headline inflation at 4.90%. Unlike the last 2 months when the Bloomberg estimates were precise to the “T”, the March 2024 inflation came in 5 bps lower than the consensus estimate at 4.85%. If you break up the inflation number, this lower than expected inflation was triggered by a marginal tapering in food inflation and core inflation, but a sharp fall in energy inflation. It is best to be a tad cautious, though food inflation trended lower from 8.66% to 8.52%, while core inflation tapered 10 bps from 3.3% to 3.2%.
However, the real trigger for lower consumer inflation in March 2024 came from lower energy inflation. This can be attributed to the ₹2/litre cut in prices of petrol and diesel ahead of the elections. That has helped to keep the overall inflation in check. At the current juncture, the RBI may have two concerns. Firstly, the headline inflation is still a good 85 basis points above the RBI inflation target of 4%. That is still better than the 150 bps gap in the US. Secondly, while core inflation has been suppressed by the normalization of supply chains, these gains may be peaking. This was the lowest inflation reading in 10 months.
MARCH 2024 INFLATION: FOOD LOWER, CORE INFLATION ALSO 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 (%) |
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% |
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% | 3.20% | 4.85% |
Data Source: MOSPI & Ministry of Finance Estimates
Here are some key points we can decipher from the table.
The month of March 2024 saw tapering of inflation, across baskets. Core inflation continues to trend lower, albeit marginally, even as food inflation also sobered. Fuel inflation impact is more because of the recent prices cuts in petrol and diesel.
FOOD INFLATION STRESS MORE ACUTE IN RURAL INDIA
In the past, we have noted on several occasions that the food inflation stress has been much higher in rural India than in urban India. That has been the case in March 2024 also. For the month of March 2024, the headline inflation was flat at 4.85%, compared to 5.09% in February 2024, with core inflation, food inflation and fuel inflation trending lower. Let us look at how the rural and urban inflation numbers resonate. Headline inflation is 24 bps lower at 4.85% in March 2024. In this same period, urban inflation has fallen from 4.78% to 4.14% while rural inflation has actually risen from 5.34% in February to 5.45% in March 2024. This rural spike in inflation was led by food prices. For instance, food inflation overall reduced from 8.66% in February 2024 to 8.52% in March 2024. In this period, the rural food inflation has risen from 8.27% to 8.61% while urban food inflation has fallen sharply from 9.19% to 8.35%. In short, had the rural food inflation been contained, then the headline inflation reading for March 2024 could have been much lower than 4.85%.
WHAT WE READ FROM THE FOOD BASKET IN MARCH 2024
Food basket with a weightage of 39% (post the weightage cut) has been the swing factor for inflation in the second half of 2023 and that has continued in 2024. The food basket is broken into rural and urban inflation and price impact is captured for each item.
Food Products |
Rural Inflation in (%) |
Urban Inflation in (%) |
Headline Inflation in (%) |
Cereals and products | 8.61 | 7.90 | 8.37 (7.60) |
Meat and fish | 6.14 | 6.83 | 6.36 (5.21) |
Egg | 10.87 | 9.49 | 10.33 (10.69) |
Milk and products | 3.50 | 3.20 | 3.38 (3.86) |
Oils and fats | -12.60 | -10.16 | -11.72 (-13.97) |
Fruits | 3.41 | 2.67 | 3.07 (4.83) |
Vegetables | 29.60 | 26.38 | 28.34 (30.25) |
Pulses and products | 17.07 | 18.99 | 17.71 (18.90) |
Sugar and Confectionery | 7.47 | 6.73 | 7.25 (7.48) |
Spices | 11.41 | 11.43 | 11.40 (13.51) |
Non-alcoholic beverages | 2.53 | 3.21 | 2.79 (2.97) |
Prepared meals, snacks. | 3.16 | 4.07 | 3.58 (3.69) |
Consumer Food Inflation | 8.61 (8.21) | 8.35 (9.19) | 8.52 (8.66) |
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.
There are some pressure points visible but the good news is that the cut in the prices of petrol and diesel by ₹2 per litre has taken the sting away from inflation. Now inflation appears to have more bark than bite, which is a much safer position to be in.
IS FALLING CORE INFLATION SUSTAINABLE FOR LONGER?
Core inflation has continued to be on a downtrend in the last few months. If you look at the last one year, core inflation has come down from a relatively intransigent level of 5.95% to the current level of 3.20%; that is a full 275 bps lower. Now, core inflation has dipped below the RBI comfort zone of 4% for headline inflation. That gives more room for volatility in food and fuel. However, there is a bigger tale in the way core inflation has come down and that has a lot to do with the supply chain constraints automatically reversing.
In the aftermath of the pandemic, the demand picked up rapidly but supplies failed to keep pace, resulting in runaway inflation and hawkish central bank policies. However, now the supplies are picking up at a rapid pace and that is resolving the core inflation problem. Core inflation is the residual inflation in the price basket after eliminating food and fuel. It includes clothing, footwear, housing, medical expenses, and entertainment. However, there is a strong aspect of core inflation that is influenced by crude prices and that is a risk factor.
HOW STATE-WISE INFLATION DIVERGED IN MARCH 2024
The national headline inflation stood at 4.85%, but some states were substantially above the national average, while some were well below the average.
It seems to be a case of Odisha continuing to experience highest inflation while Delhi faced the lower inflation in March 2024; a trend quite evident in recent months.
WILL THE RBI SURPRISE WITH AN EARLY RATE CUT?
Will lower inflation and modest IIP growth trigger rate cuts by the RBI, much earlier than expected? If one reads through the March monetary policy statement we can infer a few points from the RBI silence on the matter of rate cuts in 2024.
The RBI would most likely wait for the full budget to be presented in July 2024. However, there is a strong likelihood that RBI may not wait till the Fed cuts rates. The RBI may do a token rate cut of 25 bps to test waters. That would not be hard to comprehend, especially if we consider the elevated real interest rates in India as well as repo being decisively above pre-COVID levels. That may be an interesting area to watch out for.
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