Falling core inflation could keep consumption demand supported in coming months

There has been a sustained decline in core inflation in India. According to Reserve Bank of India or RBI, Core inflation continued to ease down to 3.4 per cent in February from 3.5 per cent in January- its lowest level in four years. Core Inflation primarily denotes the component of inflation that is likely to continue for a long period. Thus, core inflation reflects the underlying trend of inflation and is, therefore, more stable. Unlike the non-core component of inflation, core inflation is not affected by temporary shocks. In India, core inflation is generally measured by excluding highly volatile components from the headline inflation.

RBI noted in its latest monthly report that headline inflation, as measured by y-o-y changes in the all-India consumer price index (CPI), remained unchanged at 5.1 per cent in February 2024 as a positive momentum of around 15 bps was fully offset by favourable base effects. The m-o-m increase was around 10 bps and 25 bps in food and core groups (i.e. excluding food and fuel), respectively, while the fuel group witnessed a negative momentum of around 10 bps. The moderation was across all sub-groups. In terms of regional distribution, inflation remained steady in rural areas at 5.3 per cent in February while in urban areas, it softened by 10 basis points to 4.8 per cent. Majority of the states registered inflation in the range of 4-6 per cent.

Looking at the recent trends in inflation, it is clear that the bump in headline prices in second half of the calendar year 2023 was led by a sharp spike in food prices. In fact, the other component of prices – fuel and light has been witnessing deflation since September 2023, thereby making food and beverages the singular component in driving prices higher. The near term scenario will be slightly twisted following this as food and beverages are mostly turning lower and will likely to holding onto the trajectory as rabi crop supplies are offloaded in the markets over coming months. This will in turn augur well for long term consumption dynamics as softening core prices also drive inflationary expectations lower, propelling consumption. According to the RBI, the biggest segment of aggregate demand – private final consumption expenditure – remained low in December quarter, despite the third quarter coinciding with the festival season.

Outlook:

Domestic consumer durables output spiked at the start of the year 2024. According to the latest data, core industries index for consumer durables stood at 120.70 in January, up nearly 11% compared to same month last year. It also soared 5.30% on a monthly basis as a rebound in output following contraction in November 2023 stayed in place. Broad consumer sentiments appear to be in a good shape. The month of March 2024 saw a continued rise in consumer sentiment, rising 2.8 percentage points for urban Indians, according to the LSEG-Ipsos Primary Consumer Sentiment Index (PCSI).