In January, a discerning shift towards disinflation is anticipated, as headline inflation is poised to soften to 27.2 per cent year-over-year (YoY), attributed to a favourable base effect.

This decline from the previous month’s 29.7 per cent is primarily influenced by a higher base in the preceding year, while monthly pressures on consumer prices are expected to persist.

Despite the overall yearly decrease, monthly inflation is projected to rise by 0.93 per cent month-over-month (MoM), contrasting with the 12-month average of 2.2 per cent MoM. 

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Consequently, the average yearly inflation for the first seven months of fiscal year 2024 is estimated at 28.57 per cent YoY, up from 25.40 per cent YoY in the same period last fiscal year.

The surge in monthly inflation is predominantly fueled by a rise in the food and housing index. Food inflation is expected to increase by 1.76 per cent MoM, driven by inflated prices of essential commodities such as onions, chicken, tomatoes, eggs, and pulses. 

Meanwhile, the housing index is projected to experience a 1.54 per cent MoM increase, primarily due to quarterly rent adjustments. In contrast, the transport index is anticipated to decrease by 2.69 per cent MoM, attributed to relief in fuel prices.

Looking ahead, a 0.5 per cent MoM inflation rate in February could result in an annual headline inflation of around 22 per cent, with a gradual decline below 16 per cent by June 2024.

Even a 1 per cent MoM inflation rate, significantly lower than the 12-month average, is expected to maintain real interest rates from turning positive until March 2024, as illustrated in the accompanying chart depicting various monthly inflation scenarios.

Starting in January, the disinflationary trend is expected to accelerate due to the favourable base effect, the lagged impact of monetary tightening, and other administrative measures.

However, potential risks include unforeseen climate events, volatility in global commodity prices—especially oil—and external account pressures.

Rising global oil prices amid geopolitical tensions pose a threat to the inflation outlook, and an additional gas price adjustment, as suggested by the International Monetary Fund (IMF), may further intensify pressure on consumer prices.