Inflation inches down but still sticky

by Mahesh Vyas

Retail inflation, measured by the Consumer Price Index (CPI), closed at 6.44 per cent in February 2023. While this is a mild improvement from the 6.52 per cent recorded in January, inflation continues to remain above the 6 per cent upper tolerance limit set by the Reserve Bank of India (RBI) for the second consecutive month. Urban India saw an increase in inflation by 10 basis points to 6.10 per cent in February. Rural India recorded a fall of 13 basis points in inflation to 6.72 per cent this month.

Although the food group, which accounts for the highest weight in CPI, saw a fall in inflation from 6 per cent in January 2023 to 5.95 per cent in February, it acted as one of the primary reasons why inflation continued to remain sticky.

The most alarming rise in inflation was observed in the milk and products group. This group recorded a high 9.65 per cent inflation in February 2023. Inflation in prices of milk and products has been increasing for six consecutive months, and thus, it comes as no surprise to see such a rise this month as well. However, in February, inflation in this group saw an 86 basis points increase compared to the previous month - the highest observed rise since August 2022. This could be attributed to rate hikes by popular dairy brands in February. Amul, in early February, announced a price hike in fresh milk by Rs.3 per litre due to higher operating costs. Following Amul, Mother Dairy also increased prices of full cream milk and cow milk by Rs 2 per litre each in Delhi-NCR due to rising input costs. The worry is that these prices are unlikely to come back down.

Cereals and products, which carries a weight of nearly 10 per cent in CPI, also saw an increase in inflation from 16.25 per cent in January 2023 to 16.73 per cent in February. This is the sixth consecutive month that prices of cereals and products have recorded double digit inflation. However, there has been a significant decline in the pace of this increase. Inflation only rose by 48 basis points this month, compared to the 246 basis points increase in the month prior. This is because inflation in wheat prices increased at a slower pace compared to January. This follows the government’s announcement to sell wheat in the open market. So far, the government has sold 2.8 million tonnes of wheat, which has helped in the slowdown in price increases. However, the threat of El Nino, which will affect temperature and rainfall, could pose an upside risk to inflation in this group.

Prices of fruits have observed a rather substantial increase in inflation from 2.99 per cent in January 2023 to 6.38 per cent in February. This is rather surprising because such sharp rises in inflation of fruits are usually in April.

Prices of eggs, fish and meat have seen a surprising fall in inflation this month. Inflation in this group dropped from 6.30 per cent in January 2023 to 3.48 per cent in February. While a fall in inflation in this group around this time is not entirely uncommon, such a significant fall in February has not been witnessed in four years.

Outside the food group, clothing & footwear and fuel & light saw inflation ease. Inflation in clothing & footwear fell from 9.08 per cent in January 2023 to 8.79 per cent in February. This could be due to a softening of cotton prices along with increased capacity utilisation. The fuel & light group saw inflation ease from 10.84 per cent in January 2023 to 9.90 per cent in February due to softening of crude oil prices in the global market.

Thus, with eggs, fish and meat observing a dramatic fall in prices as well as the slowing down in the increase in inflation of cereals and products, inflation fell a tad in February 2023. However, soaring milk and fruit prices have arrested inflation at an elevated level.