Inflation drops to lowest level since May 2023 in March

Inflation came in at 4.9% in March, which was down from February’s 5.1%. March's result represented the weakest inflation rate since May 2023, and was slightly below market expectations. The reading was largely driven by a softer increase in prices for food and beverages. In addition, price pressures for fuel and light dropped at a faster pace. Meanwhile, core inflation was steady at 3.5%. Annual average inflation remained at February's 5.4% in March. Finally, consumer prices were stable from the previous month in March, which was below February's 0.16% increase.

Inflation should average below FY 2023’s rate in FY 2024 on past hikes to interest rates by the Central Bank and a fall in global commodity prices. That said, strong price pressures for food—which exceeded general inflation for the ninth straight month in March—pose an upside risk. The El Niño weather pattern has hit harvests, and a hotter-than-normal summer recently forecast by the national weather services could damage crops further. Government policy will be another key factor to watch, with wheat, sugar and rice currently subject to export quotas.

Sonal Varma and Aurodeep Nandi, analysts at Nomura, said: “Core inflation momentum may rise in the near term owing to higher gold prices, which is why the super core momentum (ex-petrol, diesel, gold and silver) will be an important metric to monitor. We expect headline inflation to dip below 4% in Q3, reflecting a favourable base effect, and average 4.6% in Q4. Overall, this should lead to inflation averaging 4.5% in 2024 vs 5.7% in 2023 (FY24: 5.4%; FY25: 4.3%).”

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