Veggies surprise positively, but sticky core inflation a worry

Inflation, as measured by the Consumer Price Index (CPI), moderated sharply to 5.88% on-year in November, from 6.77% October. This is the first print below 6% (the RBI’s upper tolerance limit for inflation) since January 2022. While a moderation was expected (due to lower vegetable prices and some sequential easing of post-festive demand), the fall is a positive surprise. The headline number was largely brought down by sharper-than-expected easing of vegetable prices. But pricey cereals and milk continue to exert pressure on overall inflation.

Retail inflation fell in November largely due to deflation in vegetable prices (both on-year and sequentially). Contribution of food inflation to headline thus fell to 31% in November (from ~41% in October). Fuel inflation jumped up on-year, but that can be attributed mostly to a low-base effect from last year. Core inflation remains around 6% indicating recovering demand and continued pass-through of input prices, even post the festive season. We thus maintain our CPI inflation forecast of 6.8% for this fiscal, compared with 5.5% previous year.

Inflation trends in November: Highlights

• CPI inflation slowed to 5.88% on-year in November, from 6.77% in October — though it was higher than 4.9% a year ago
• Food and beverage inflation saw the maximum softening to 4.7% from 7% in October
• Fuel¹ inflation broke the trend of continuous moderation, jumping higher to 10.6% in November (vs 9.9% previous month- largely from base effect)
• Core CPI² inflation remained sticky at 6%, same as in previous two months

¹ Refers to CPI fuel and light
2 CPI excluding food and beverages and fuel and light