India’s CPI inflation accelerated to 5.08% YoY in Jun-24 from 4.80% in May-24 (revised up from 4.75% earlier). While the headline print trumped market consensus expectation of ~4.8%, it turned out to be close to our estimate of 5.0%. 

This is the highest CPI inflation print since Feb-24 and has disrupted the gradual but steady disinflationary trend seen over the last two quarters. Clearly, the uptick was driven by a spurt in food inflation which stood at 9.4% and 3.2% on an annualized and sequential basis respectively.

Key highlights 

• On sequential basis, CPI rose by 1.33% MoM. This is significantly higher than the series median sequential increase of 0.78% in the headline index associated with the month of June. 
• The predominant change in the headline inflation is on account of the Food & Beverages index. While remaining elevated, annualized food inflation jumped to a 6-month high of 9.4% in Jun-24. The increase in food price pressures (primarily led by Vegetables), has been on account of a combination of severe heatwaves and subdued monsoon performance in Jun-24. Vegetable inflation climbed sharply to 29.3% and 14.2% on an annualized and sequential basis respectively. 
  1. Although this captures the adverse summer seasonality, the impact this time seems to have gotten exacerbated by worsening of heat wave conditions and a subdued monsoon performance (despite an early onset, June ended up with a rainfall deficiency of 11% vs. the long period average). Filtering out the summer seasonality impact, Vegetables (esp. Tomatoes, Onion, Brinjal, Cauliflower, Green Chilly, Cabbage, Radish, Potato, Pumpkin, Spinach, and Beans) seems to have borne the brunt of severe heatwaves and rainfall deficiency in Jun-24.
• Consolidated fuel inflation remained in negative territory for the tenth consecutive month, with Jun-24 print remaining unchanged at -3.3% YoY.
• Core CPI inflation (captured by CPI excluding indices of Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) remained steady at 3.3% YoY in Jun-24 (the figure for May-24 saw a modest upward revision from 3.2% earlier to 3.3%).  Barring the category of ‘Education’ that saw an increase in sequential price pressures, all other categories of core inflation depicted mild-to-moderate sequential price pressures. 

 Inflation Outlook

With Jun-24 data, India’s CPI inflation has entered a temporary and transient phase of turbulence. The breach of 5% on the upside is likely to be followed by a dip below 4% in Jul-Aug 2024. This will be caused by a strong shift in statistical base effect (in favour) along with traction in monsoon progress (after posting a deficit of 11% in Jun-24, south-west rainfall has clocked a surplus of 11% in the first twelve days of Jul-24). Having said, there is a likelihood that abating of heatwave conditions with pick-up in rainfall activity shows up in lower food prices with a lag of 1-2 months. Meanwhile, on a comforting note, the kharif sowing remains healthy, up 14.1% YoY (as of Jul 8, 2024) and augurs well for the overall food basket.

On a separate note, major telecom service providers announced substantial tariff hikes (of the order of 15-25%) in Jul-24. Telecom charges (including internet) have a cumulative weight of 2.1% in the CPI basket. Since such an upward price reset is taking place after a gap of nearly three years, the incremental impact could be the tune of 20-30 bps on CPI inflation, contingent upon the manner of pass-through.

The upward pressure on headline inflation from hike in telecom tariffs may get partially offset by the restrained adjustment seen in minimum support price for kharif crops in AY25 at 6.6% vs. 7.4% in AY24 (as per our estimates, this will provide a disinflationary impact of 10 bps).

Meanwhile, the global uncertainties continue to persist. 

• International commodity prices have come under some pressure in recent months on account of resilience in global demand and surge in geopolitical risk premium. While the pass-through will be lower as well as lagged in the case of CPI (dominated by non-tradables), it could nevertheless imply some price pressures for core inflation in H2 FY25.
• Further, the ongoing disruptions to maritime trade routes in the Middle East region are expected to lead to cost escalations, which could reflect in core inflation with a lag. 

Overall, we believe that the benign fuel prices along with expectation of a respite on food prices after a favourable monsoon would help CPI inflation glide towards 4.5% in FY25 from 5.4% in FY24. However, factors that can impact inflation in the near term would be the telecom tariff hikes (likely to carry a 20-30 bps incremental upside), the annual MSP adjustment (likely to impart a 10 bps incremental downside) and any imbalances in the monsoon rainfall distribution. 

Says Suman Chowdhury, Chief Economist and Head-Research “The headline CPI inflation was higher than consensus expectations at 5.08% in Jun-24 as compared to 4.75% in May-24. This is the first time in four months that the CPI inflation print has seen a significant sequential rise, largely driven by the increased food inflation which stood at 9.4% YoY vs 8.7% YoY in the previous month. Vegetables prices have been particularly on fire (29.3% YoY) in June due to the continuing summer heat waves in some parts of the country.

While we expect the vegetable prices to cool down over the next 2-3 months with the expected progress in the monsoon, it is difficult to predict the trajectory of food inflation in India at this stage. The average CPI inflation in Q1FY25 has been on expected lines at 4.9% but there are near term risks to inflation from any inadequate distribution of the monsoon and the recent telecom tariff hikes, which will keep RBI cautious.  

Despite the likelihood of a Fed rate cut having increased for Sep-24, we don’t expect any monetary easing measures from RBI till Dec-24.”

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: Median CPI inflation continues to slide lower, reflecting the broader trend of inflation moderation across all items

Chart 2: Despite a subdued rainfall outturn in Jun-24, kharif sowing depicts a healthy performance so far