India’s inflation metrics posted a mild increase in Dec-23, with CPI and WPI inflation inching up to 5.69% YoY and 0.73% YoY from 5.55% and 0.26% respectively in Nov-23. Both inflation metrics posted a downside surprise vis-à-vis market consensus expectation of 5.9% and 0.9% for CPI and WPI inflation respectively.

Key highlights of Dec-23 CPI inflation

Sequentially, CPI printed at -0.32% MoM (marginally lower than the series average contraction of 0.39% MoM seen in the month of December) vs. an increase of 0.54% MoM in Nov-23. 

• The sequential decline was led by the Food & Beverages basket that fell by 0.73% MoM. This was on account of the seasonal fall in prices of Vegetables, Fruits, Meat & Fish, and Spices.   
  1. While decline in price of vegetables is comforting and was on expected lines, the correction has been milder in comparison to the usual winter seasonality. In particular, the POT (Potato, Onion, Tomato) index continues to remain higher than the historical trajectory.
  2. There was respite seen in case of Meat & Fish (second consecutive contraction) and Spices (first sequential contraction in 28-months).
• The consolidated fuel basket posted a modest increase of 0.1% MoM with the corresponding annualized inflation remaining in deflation territory for the fourth consecutive month.
• Core inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous basket) rose by a modest 0.1% MoM sequentially, the lowest in 3-months. This was predominantly on account of a seasonal contraction in the Housing index along with the subdued momentum seen in the case of all other categories, except Health and Personal Care & Effects. On an annualized basis, core inflation eased to a new post pandemic low of 3.9%.

Key highlights of Dec-23 WPI inflation

1. While consolidated food & beverages inflation increased to a 4-month high of 5.3% YoY from 4.7% in Nov-23, sequentially the index fell, in line with the trend depicted by the CPI food & beverages index.
2. Consolidated fuel inflation printed at -2.0% YoY, marking its eighth consecutive negative print. In contrast to CPI, wholesale prices for petrol and diesel (besides others) saw a sequential price correction.   
3. Core WPI (includes Manufacturing ex Food Products, Primary Non-Food, and Primary Mineral indices) printed at -0.8% YoY, marking its tenth consecutive negative print. 

Outlook on inflation

Notwithstanding the moderate increase in headline CPI inflation over last 2-months, there is comfort in the fine print. At a broad level, while the anticipated upside risks (esp. on account food items) have played out, their intensity appears to be lower vis-à-vis expectations. More importantly, this has coincided with further entrenchment of the ongoing disinflation in core CPI items.

Lagged impact of past monetary tightening, government’s prompt administrative interventions towards mitigating food supply risks, along with a moderation in international commodity prices over the last one year, appear to be having the desired effect on the core inflation levels. 

On average, CPI inflation in Q3 FY24 printed at 5.4%, lower than RBI’s most recent estimate of 5.6%. If upside risks to food inflation (from tardy progress in rabi sowing and persistence of El Nino risks) stay moderate in the near-term along with range-bound movement in international commodity prices, then a minor downside to RBI’s Q4 FY24 CPI inflation estimate of 5.2% cannot be ruled out. This in turn could potentially provide a 20 bps downside to our (Acuité Research) full year headline inflation forecast of 5.6%.

Having said so, there are reasons to remain vigilant:

• Domestically, factors like the truckers’ strike (albeit short-lived) and warmer than normal temperatures need to be monitored.
• Although Core WPI inflation remains in deflation territory, it has started to inch up. This could start spilling over to Core CPI inflation after 3-4 quarters.
• Globally, the spillover impact of the ongoing Israel-Hamas war on disturbances in the Red Sea trade route needs a scrutiny. Although crude oil prices have not shown signs of a runaway pressure yet (helped by timely cut in price by Saudi Arabia), persistence or escalation of disturbances in the Red Sea trade route will be inflationary as freight operators will be forced to take the Cape of Good Hope route, thereby adding to cost as well as time delays.

Says Suman Chowdhury, Chief Economist and Head- Research, Acuité Ratings & Research “CPI inflation for Dec-23 has been slightly better than expectations and translated to an average of 5.4% for the third quarter of the fiscal as compared to the RBI forecast of 5.6%. Also, the core retail inflation has come below 4.0% and the core wholesale inflation remained in contractionary zone for the tenth month in Dec-23, providing comfort to the central bank. We expect the headline inflation trajectory to remain benign in the last quarter of the fiscal at around 5.0%-5.2% but there are upside risks from the continuing El Nino phenomenon and its impact on the rabi crop output. While food inflation saw an expected sequential contraction, it still stood high at 9.5% on a YoY level last month due to the continuing firmness in the prices of pulses and cereals. 

We expect MPC to be closely watchful of the inflation trajectory till the onset of the summer season before taking any decision on a pivot of the monetary policy. The rate decision by Fed and other developed nations will also be a factor in the MPC stance in the current calendar year.” 

Table1: Overview of key sub-components of inflation

Note: 

1) CPI-Consolidated Fuel index includes Fuel & Light and Petrol & Diesel indices from the Miscellaneous basket

2) CPI-Core excludes Food & Beverages and Consolidated Fuel indices from Headline CPI

Chart 1: Despite moderation, TOP prices remain elevated vs past trend

Chart 2: Core CPI inflation is significantly lower than the long-term trend

Chart 3: Although subdued, WPI inflation has started inching up gradually