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Decisive moderation is still some way off

* January CPI spiked to 6.5%, led by food inflation, while core inflation rose to 6.4%. Vegetable prices continued to fall, whereas cereal prices spiked amid supply mismatches, with mandi prices suggesting the trend will continue in February so far. However, we note the sharp discrepancy between official and calculated CPI for cereals – with headline CPI being ~34bps lower if using the calculated cereals index. The sequential rise in core inflation was mostly broad-based, with personal care and effects leading the show – up 1.6%, which is a 10-month high.

* We are currently tracking February inflation at 6.3%. Near-term pressures for headline inflation could arise from a sustained uptick in cereal prices, and we are watching the impact of the recent policy responses to deal with domestic supply bottlenecks, amid rising global (wheat) prices. Besides, the risk of further rise in global commodities, uncertain FX, and sticky services inflation could keep the inflation trajectory elevated. The durable disinflationary trend looks to be elusive going ahead, with even global inflation not declining as smoothly as anticipated.

* Today’s inflation shocker shows how uncertain the inflation trajectory can get, even for near-term estimates. We see Q4FY23 inflation overshooting the RBI’s revised forecast by ~50bps, although we retain our FY24 forecast at 5.2% at present. Higher-than-expected headline inflation and stickiness of core will be a sore point for the RBI and could lead to further tightening by 25bps in April. However, the RBI would continue to be non-committal on future rates path, as the fluid global situation demands frequent macro re-assessments. The extent of global disruption and disinflation will also remain key to the RBI's reaction function ahead

CPI inflation at a three-month high, led by a sharp rise in food inflatio

CPI inflation spiked to 6.5% in January (Emkay: 6.1%; Consensus: 6.0%; prior: 5.7%) – the highest print in three months, led by a sharper-than-expected rise in food inflation, as well as a broad-based increase in core inflation. This puts the RBI’s downwardly revised Q4FY23 CPI forecast of 5.7% at material risk. Food inflation rose sharply (5.9% YoY, 0.3% MoM, 4.2% prior), largely due to a spike in cereal prices (16.1% YoY, 2.6% MoM). However, there is a stark discrepancy between official and calculated CPI cereals index for the month, based on individual subcomponents. We estimate that the cereals index should have contracted by 0.1% MoM, which would have meant headline inflation being lower by ~34bps vs. the official print of 6.52%. Vegetable prices continued to fall (-11.7% YoY; -3.8% MoM), but prices of fruits, meat, and milk inched higher, while prices of spices (1.6% MoM) and eggs (2.3% MoM) saw substantial sequential momentum. High-frequency mandi prices show vegetables prices continuing to contract, while cereal prices remain somewhat strained amid supply mismatches. However, with the government having sold some of its wheat buffer stock to curb domestic price spikes, amid a global increase in wheat prices, cereal prices should moderate going ahead

Demand-driven core inflation stays elevated at 6.4% with increasing personal care costs

Core inflation (ex-food, fuel, and intoxicants) increased to 6.4% YoY (0.5% MoM vs. 0.3% prior), largely due to higher prices of personal care and effects (led by higher gold prices) and housing. Core inflation has been persistently above 6.2% for 14 of the last 15 months now, with the RBI stressing on this having second-round impacts on overall inflation. The higher sequential momentum in recreation and personal care was somewhat offset by slower growth in household expenses, clothing, healthcare, T&C, and educational costs. Lower input costs could help moderate core inflation mildly, but the near-term sustained demand for services is likely to continue putting upward pressure, as indicated by high output prices in PMIs.

December IIP robust, led by broad-based growth and favorable base effect

December IIP was slightly lower than expected, growing 4.3% YoY (Emkay: 4.5%; Consensus: 5.0%; prior: 7.3%), with strong and broad sequential momentum, as well as a favourable base effect. Manufacturing output rose 2.6% YoY (4.7% MoM), with segments such as petroleum and chemicals supporting growth. Electricity grew 16.7% (7.6% MoM), while mining activity rose 7.2%, with strong sequential momentum as well. In use-based sectors, all sub-sectors other than consumer durables saw sequential growth. Overall IIP has grown by 2.5% on a three-year CAGR basis

Inflation surprises to keep the RBI on its toes

Today’s inflation shocker led by food as well as consistently higher core inflation momentum has depicted that we are far from the ‘durable disinflation’ process. The RBI’s own inflation forecasts show how uncertain the inflation trajectory can get, even for near-term estimates and possibly explains why it maintained the current stance of withdrawal of accommodation to keep policy flexibility ahead. This print will further strengthen RBI’s view that the stickiness of core inflation could unmoor inflation expectations and lead to second-round effects in the medium term. We are currently tracking February inflation at ~6.3%, while Q4FY23 inflation may now be 50bps higher than the RBI’s revised estimate of 5.7%. Having kept its options open, the RBI may now hike rates by another 25bps in April. Separately, available January reports so far suggest global CPI inflation is not declining as smoothly as anticipated, and markets are now eyeing tomorrow’s US CPI print to gauge further. This, combined with the fluid global situation, implies macro assessments might require frequent adjustments. The extent of global disruption and disinflation will also remain key to the RBI's reaction function ahead.

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