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We are well past the peak inflation of 2022. Yet, inflation continues to be the focal point of all the policy discussions and investment thesis in 2023. Central banks, though somewhat less aggressive than last year, remain in inflation-fighting mode. Markets are divided on whether to follow central banks in fighting inflation or fight the central bankitself against raising rates.  

Amidst all this, inflation numbers have started showing some interesting trends. The headline CPI inflation dropped by 169 basis points in the fourth quarter of 2022, from 7.41% YoY in September 2022 to 5.72% YoY in December 2022.

Some softening in inflation numbers was widely expected due to seasonal drop in vegetable prices with winter crop arrivals and base effect turning favorable.But, the quantum of disinflation in the last two months surprised almost everyone on the street.

As per market consensus estimates, CPI inflation was expected around 6.3% in November 2022 and 5.9% in December 2022. Actual headline CPI came at 5.88% and 5.72% respectively. The gap was almost entirely contributed by a larger than expected drop in vegetable prices which fell by a cumulative 21% in the last two months of 2022.

The CPI inflation ex-vegetables inched up to 7.2% andthe Core CPI (CPI excluding food and fuel) remained sticky around 6.1%. Thus, at a broader level inflation remained elevated when calculated as year-on-year price changes.  

However, on a sequential basis (month-on-month price changes) inflation has been cooling off acrossvarious household goods and services. Energy prices have also stabilized after a sharp jump in the last year.  

Food inflation ex-vegetables though remain elevated, should also come down as increased Rabi sowing and colder winter are expected to boost food output and thus reduce price pressure.

With the current trend, inflation should fall closer to 5% in FY24.

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