Food and beverages, excluding vegetables, with a weight of over 54 per cent in the CPI basket pushed the January CPI print to three months high. While maximum contribution came from cereals, items such as meat & fish, eggs, milk products, spices along with prepared meals, snacks, sweets, etc. also saw high inflation.

Between January and November last year, edible oil and sugar played a major role in spiking inflation, but in January 2023, their prices were subdued. Fruits recorded moderate inflation mainly on account of seasonal factors which also brought down the prices of vegetables. 

The contribution of food inflation to overall inflation rose to 44 per cent in January from 37 per cent in December. Apart from food and beverages, inflation for footwear and fuel continues to be in double digits which also impacted the headline inflation. 

  • What is causing the surge in inflation in cereals? Is there a way to control it? 

Three factors are responsible for the higher prices of cereals and these are soaring input prices, concerns about the weather, and increased market uncertainties stemming from the war in Ukraine.

Here too, three factors can help in controlling the rise and these are open market sales by the government, higher acreages, and most important how the climate behaves during March-April. 

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Core inflation has become a major driver in recent months
  • With core inflation remaining sticky, does it mean that the CPI print will remain elevated for some time? 

Core inflation, which tracks the price behaviour of various goods and services but excludes fuel and food, remains sticky at over 6 per cent on account of higher inflation of housing, personal care, and healthcare.  

Experts expect the core inflation to remain elevated in the coming two months as producers are expected to pass through higher prices of inputs.

Also, demand for services is expected to be robust. Resolution of the Monetary Policy Committee, after its meeting during February 6-8 said, “Headline inflation excluding vegetables has been rising well above the upper tolerance band and may remain elevated, especially with high core inflation pressures. Inflation, therefore, remains a major risk to the outlook.”

This clearly indicates that not much moderation is expected.  

  • Will the CPI projection for Q4 of 2022-23 have to be revised upward now? 

RBI projection for Q4 (January-March) is 5.7 per cent and for the full fiscal, it is 6.5 per cent. These projections were made ahead of the release of the retail inflation number for January. Considering the surge in January, a revision in both Q4 and the yearly numbers is warranted.

However, RBI would like to wait for the February number and then take a call. It may be noted that the next meeting of MPC is expected to take place in April and normally revisions in the inflation outlook take place at that time only. 

  • What does this mean for RBI’s rate action going forward? 

Another round of policy rate hikes cannot be ruled out as most analysts have projected 6 per cent inflation in February too. March may also not see much relief as harvesting of Rabi crops normally begins in April-May. 

  • Will the Centre take any action to control inflation? 

As of date, the surge in inflation is mainly on account of supply constraints. Though the government managed to improve the supply of edible oil and their prices have softened. Not much worry is there on the fuel front. So, the key here is cereals. The government’s decision of the 3 million tonnes open market sale of wheat has not impacted the prices much.

Now, the decision to sell wheat at ₹2,350/quintal to bulk users through e-auction can have some impact on open market wheat price. Also, some downward revisions of the GST rate on various items could impact inflation, but as of date, there is no indication of that.