India’s CPI inflation posted a mild deceleration to 4.75% YoY in May-24 from 4.83% in Apr-24. This headline print is moderately lower than market consensus expectation of approximately 4.9%. 

Key highlights

• On sequential basis, CPI rose by 0.48% MoM. This is lower than the series median sequential increase of 0.75% in the headline index associated with the month of May. 
• Annualized food inflation has remained sticky, above 8.0% levels for the last 7 months. For the month of May-24, build-up in price pressures was observed in the case of Vegetables, Egg, Pulses, and Sugar & condiments to some extent. This was partially compensated by a sequential drop in prices of Fruits and Spices & condiments. 
• Consolidated fuel inflation remained in negative territory for the ninth consecutive month, with May-24 print coming at -3.5% YoY vs. -3.6% in Apr-24. While the impact of fuel price cuts announced by the government in Mar-24 continues to linger and have a sobering impact, the month of May-24 captured a sharp sequential hike in electricity tariffs.
• Core CPI inflation (captured by CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous basket) slipped to a fresh record low of 3.2% YoY in May-24 vs. 3.4% in Apr-24. Barring the category of ‘Personal care & effects’ that saw continuation of price pressures (reflecting higher price impact of gems & jewellery items), all other categories of core inflation depicted mild-to-moderate sequential price pressures. 

Inflation Outlook

India’s headline inflation dynamics continue to offer a sense of comfort with CPI remaining within the target band for nine consecutive months, with pace of moderation towards the 4% target remaining gradual. Having said, there are few conflicting signals one need to be wary of:

• Food inflation momentum has undershot its usual summer seasonality despite the country experiencing above normal heat wave conditions. While that offers some respite, overall food inflation continues to remain elevated. More importantly, it is not showing any signs of cooling off – on the contrary, there is some evidence of generalization of price pressures in the food basket.
• Meanwhile, heat wave conditions continue to intensify, esp. in areas which typically see the arrival of monsoon towards the end of June. Reflection of this in the form of a short-term spike in food prices, esp. in the case of vegetables and fruits, remains a possibility.
• 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.

Notwithstanding the above-mentioned concerns, IMD’s forecast of 6% surplus rainfall in the South-West monsoon season is expected to provide a calming effect on food prices post Jul-24 (while monsoon rains had a timely start, they appear to have lost some momentum – as of Jun 12, 2024, the country saw a 4% deficit in cumulative rainfall).

Overall, we believe that the recent fuel price cuts along with expectation of weather-related respite on food prices would help glide CPI inflation lower towards 4.5% in FY25 from 5.4% in FY24 although the path of moderation may face tough resistance. 

Says Suman Chowdhury, Chief Economist and Head – Research “CPI inflation for May-24 dipped only slightly by 8 bps compared to Apr-24, highlighting the resistance it faces in reaching near the RBI MPC target of 4.0%. Sequentially, the headline inflation print rose by 0.48% largely and expectedly driven by food inflation in the summer season, almost by the same extent as in the previous month.

The annualized food inflation remained firm at 8.7% in May-24 with a sequential rise of 0.7% driven by higher prices of vegetables, pulses, eggs, fish and meat that is typical in the summer heat. Policymakers will continue to derive comfort from the Core CPI inflation (excluding all food and fuel components) which dropped further to 3.2% in May-24. Nevertheless, we expect RBI to maintain the status quo on the monetary policy till the third quarter given the strong growth momentum in the economy and the uncertainty on rate cuts in the developed economies.”

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: Food inflation continues to remain elevated, showing signs of generalization of price pressures