Number Theory: Four charts that explain the inflation numbers

Food items account for 39% of the overall CPI basket. Non-food inflation, the data shows, has fallen consistently in the last one year.

India’s benchmark inflation number, as measured by the Consumer Price Index (CPI), moderated from its 5.7% print of December 2023 to 5.1% in January 2024. What are the underlying drivers of this moderation in inflation? Will it change the hawkish tone of monetary policy as seen in the Monetary Policy Committee (MPC) resolution last week? Here are four charts which try and answer this question.

Reserve Bank of India. (HT Photo)

Four charts that explain the inflation numbers

• 
  Food prices explain most of the volatility in headline inflation number in the recent past

  Headline CPI print has fluctuated wildly in the last one year. It stood at 6.5% in January 2023, fell consistently to reach just 4.3% by May 2023 and then jumped suddenly to 7.4% in July 2023. A disaggregated analysis of the CPI numbers shows that most of the volatility in the headline CPI number is on account of fluctuations in food inflation. Food items account for 39% of the overall CPI basket. Non-food inflation, the data shows, has fallen consistently in the last one year. This is exactly why the MPC has been flagging the risks of food prices to the overall inflation environment, even though interest rates can do precious little to control food prices. While RBI has acknowledged supply-side efforts the government top control food prices, it has retained its hawkish tone to convey the message that it will maintain vigilance against any spillover of food inflation to overall prices.
• 
  To be sure, food inflation is varied across food items

  The headline print of 8.3% food inflation does not tell us what exactly is happening to food prices. Disaggregated data for subcategories within the food basket of CPI shows that the inflation trends across food items are quite varied. While vegetable and pulse inflation are growing in high double digits, items such as edible oil are actually experiencing a decline in prices. Cereals, which have become an important driver of food inflation in the recent past, have seen some moderation in inflation, even though they continue to be higher than comfort levels. While a seasonal correction in vegetable prices could bring this number down for a couple of months, an overall moderation in food inflation will have to wait for a sustained cooling in cereal and pulse prices.
• 
  Seasonal food shocks are a challenge to inflation targeting at a time when core inflation is benign

  While fear of seasonal shocks to food prices upsetting overall inflation numbers continues to occupy the concern of monetary policy, at least one inflation indicator suggests that Indian economy should not be worried about prices at all. This is what is the trend in the core CPI number, which measures the non-food non-fuel part of the CPI basket, and is believed to be more immune to seasonal or exogenous price shocks. Core inflation, according to the Centre for Monitoring Indian Economy (CMIE) database fell to 3.6% in January 2024, the lowest this number has been since December 2019. This number, when read with extremely low wholesale inflation – wholesale price index grew at just 0.7% in December 2023 – shows that non-food inflation, both for consumers and producers, continues to be extremely benign in the Indian economy.
• 
  But inflation expectations continue to be high

  Latest data from an RBI survey on household inflation expectations shows this clearly. Current perception of inflation and inflation expectations for three month and year-ahead periods were pretty much unchanged between the November 2023 and January 2024 rounds of the survey even though headline CPI number has fallen from 5.6% to 5.1% during this period. To be sure, these numbers have fallen over the last one year. It is perhaps this stickiness in inflation expectation numbers which is driving the hawkish tone of the MPC.