Retail inflation declines to a five-month low in Jan 2025

CPI inflation got the breather from a favourable correction in food inflation buoyed by seasonality factors and better supply side dynamics. The high frequency price data for February-25 is continuing to show softening in Feb’25 as well, especially for Tomato and Potato the downward fall is persisting at a steeper pace. Core is also insulated. Recent company financials again have pointed out that demand recovery has been skewed and concentrated in a few segments.

“Thus, we believe core inflation is likely to be capped. An easing CPI print is comforting from a monetary policy standpoint as well, when global uncertainty poses some significant ambiguity in terms of currency, liquidity and upcoming monetary policy response,” says Dipanwita Mazumdar, Economist, Bank of Baroda.

Food comforted headline

CPI inflation moderated to its lowest since Aug’24: CPI inflation softened to 4.3% in Jan’25 from 5.2% in Dec’24 on YoY basis. The undershooting was supported by a significant correction in food inflation which went down by 237 bps to 6% in Jan’25 from 8.4% in Dec’24. The major slump was noticed in the case of vegetable inflation (11.3% in Jan’25 compared to 26.6% in Dec’24). Bumper arrivals of TOP (Tomato, Onion and Potato) since Nov’24 has contributed to the same.

The CPI disaggregated index of TOP has fallen by -23.9% on MoM basis, the largest sequential drop since Sep’23, in the series. Among other items of food basket whose share is significant is pulses and its downtrend persisted in Jan’25 as well (2.6% compared to 3.8% in Dec’24). Cereal inflation also softened (6.2% from 6.5% in Dec’24) as international prices were largely contained and supported by adequate domestic buffer stock. Egg inflation albeit its seasonal adjustment has shown significant easing, attributable to improved supply. On the other hand, there are a few items such as fruits (12.2% from 8.6% in Dec’24) and oils and fats (15.6% from 14.6%), which remained upbeat.

For Oilseeds, despite some softening of international prices, unfavorable base came into play. The government’s efforts are already continuing in the form of extending purchase under price support scheme which will be helpful in bringing down inflation on this front, in the near term.

Importantly, CPI excluding vegetables has been below the 4% mark for 13th month in a row. Now that vegetable prices are also calming, it provides RBI the breather in terms of policy space.

MoM picture: “Much of the fall in CPI is attributable to seasonality. The seasonally adjusted Consumer Food Price Index has fallen by 1.4% against the unadjusted series of -2.9%, on MoM basis. However, a closer look at the sequential picture mirrors the same YoY trend. The slump is “vegetable driven” as on a MoM basis, vegetable inflation fell by -15.7%. Pulses and oilseeds also underwent some moderation. Milk prices showed some stickiness. However, the recent reports of cuts in prices will feed into the Feb’25 prices,” says Mazumdar.

According to India Ratings and Research, the sharp decline in January 2025 retail inflation was led by vegetables, declining to less than half in January 2025 (11.35%) from December 2024 (26.56%). Retail inflation was at a five-month low of 4.31% in January 2025. The core inflation remained nearly stable in the same period, alleviating fears of demand pressure on Indian economy. The core inflation has remained around 3.6% since October 2024.

“Sustained decline in cereals inflation is expected to give relief both to the consumers as well as the government. The decline in vegetables inflation is expected to continue in the next couple of months, leading to inflation in February and March 2025 to be in the 3.9%-4.0% range,” says Paras Jasrai, Senior Economic Analyst at India Ratings and Research.

This has brightened the prospects of 4QFY25 inflation meeting RBI’s forecast of 4.1%. However, if the prevailing temperature in February continues till March 2025, it will have an adverse impact on rabi crop production. The monetary policy action in April 2025 monetary policy is dependent on i) currency movement and ii) liquidity in the system. The future policy easing would be data-dependent.

Going forward, Ind-Ra expects the industrial output to grow in the range of 3%-4% yoy in January 2025 due to a high base effect (January 2024: 4.2% yoy). The high frequency indicators so far appear to be indicative of a slowing progression in industrial activity. While the electricity demand moderated to a three-month low of 1.9% yoy, petroleum consumption and coal production remained subdued at 3.1% yoy and 4.4% yoy, respectively in January 2025.