Inflation is a worry, but it is set to moderate going forward

Even as CPI inflation inched up to a four-month high of 5.69 per cent in December from 5.6 per cent a month ago, one may have to wait for a while to see moderation in inflation. The pick-up in inflation was driven by an unfavourable base effect of around 10 bps. Inflation in all the other components increased at a lower rate when compared to the previous month. The sequential uptick in the headline CPI inflation was entirely led by the food and beverages segment, with all the other sub-groups either reporting an easing or similar YoY prints in December compared to the previous month. Within the food segment, vegetables were expectedly the main culprits, even as seven of the 12 sub-segments witnessed a moderation in their YoY inflation print in the month. The outlook for the inflation for certain items like rice, wheat and pulses, as per Icra, remains somewhat vulnerable, given the estimated fall in annual kharif production, as well as the YoY lag in the ongoing rabi sowing season amid El Nino conditions.

Interestingly, the core CPI inflation inched below the four per cent-mark, for the first time in the post-Covid period, counterbalancing the elevated food inflation print. Even with an unfavourable base, the support came from a 0.9 per cent sequential decline in food prices. Sequential declines were noted in vegetable, fruits, meat and fish, and spices prices. The arrival of winter crops helped in easing the pressure on vegetable prices that declined by five per cent MoM. Core inflation continued its downward trajectory registering a growth of 3.9 per cent, which has been the slowest in the last four years. YES Bank’s model indicates headline CPI of 5.4 per cent for FY24 and 4.8 per cent for FY25.

Looking ahead, analysts have forecast that the CPI inflation will moderate appreciably to 5.2 per cent in the current month, helped by a dip in the food inflation print due to an adverse base. Either way, rate cuts are unlikely to emerge before August, with a stance change expected in the preceding policy meeting. Experts believe that the RBI will be on a long pause and call for a cut in the August policy. The divergence of headline CPI from Core CPI, in place of convergence, is due to high food CPI in general, and fruits, vegetables, spices, and cereals CPI in particular. These prices may not come down much, as per Ecowrap, but are expected to hold at nearly the same level in Q4. Once the aforesaid four item-wise CPI comes under control, headline inflation will reduce to drastic levels. It could come near the mid-point of RBI inflation target of our per cent. Above all, experts see FY25 headline inflation at 5.2 per cent and the core at four per cent.