Photographer: Ruhani Kaur/Bloomberg

CPI Inflation At Six-Month High As Food Prices Start To Rise

Retail inflation accelerated to a six-month high as food prices rose from unusually low levels. However, core inflation fell reflecting subdued demand conditions in the economy.

Consumer Price Index inflation stood at 2.92 percent in April 2019 compared to 2.86 percent in March 2019, according to data released by the Ministry of Statistics and Program Implementation on Monday. A Bloomberg poll of 39 economists had estimated inflation at 2.99 percent for April 2019.

Despite the pick-up, inflation remains below India’s inflation target of 4 (+/-2) percent, leaving room for the Monetary Policy Committee (MPC) to cut rates further. The policy repo rate has been pared by a cumulative 50 basis points in 2019.

Inflation Internals

  • Rural inflation stood at 1.87 percent in April 2019 as against 1.80 percent in March 2019.
  • Urban inflation stood at 4.23 percent, compared to 4.1 percent the previous month.
  • CPI food inflation rose to 1.3 percent in April 2019 compared to 0.66 percent in March 2019.
  • Clothing and footwear inflation was at 2 percent compared to 2.59 percent in March.
  • Fuel and light inflation stood at 2.5 percent in compared to 2.42 percent in March 2019.
  • Housing inflation stood at 4.7 percent in April compared to 4.93 percent in March.
  • Inflation in the households goods and services segment stood at 5 percent compared to 6.05 percent in March.
  • Inflation in the transport and communication segment came in at 2.4 percent in April compared to 2.98 percent in March.
  • Health inflation was at 8.4 percent compared to 8.86 percent in March.
  • Inflation in the education segment in April 2019 was at 6.9 percent compared to 7.58 percent in March 2019.

Rising Food Prices; Falling Core Inflation

Low inflation throughout 2018-19 was driven by food prices, which fell more than anticipated. While this helped bring down headline inflation, core inflation, which excludes volatile food and energy prices, remained high.

The trend has now seen a reversal.

While inflation in food and beverages was at a nine-month high on account of rising prices, core inflation, according to Bloomberg, dipped to an 18-month low of 4.55 percent.

“CPI headline inflation came slightly below expectations, with core inflation seeing a welcome downside surprise, which is in tandem with the growing slack in the economy,” said B. Prasanna, head of global markets at ICICI Bank. “Moreover, food inflation continued to rise with sustained upward momentum in fruits and vegetables. We expect this trend to continue over the summer months,” he added.

Implications For Monetary Policy

Even though headline inflation is rising, the monetary policy committee will still see room for lowering rates. Falling core inflation will ease concerns expressed by some MPC members who had debated whether this elevated level of core prices reflects limited slack in the economy.

The MPC is set to meet next in June and the probability of a rate cut remains on the table. Weakness in growth indicators such as the Purchasing Managers’ Index and the Index of Industrial Production may strengthen the case for a third rate cut this year.

However, the timing of that cut may depend on the new government’s fiscal strategy among other factors, said Sunil Kumar Sinha, principal economist at India Rating.

Clearly signal on the inflation front are somewhat mixed and RBI will have to keep a close vigil on inflationary expectation/ inflation trajectory. Also fiscal policy stance of the new government would be an important element to watch for. Ind-Ra therefore believes that under the current growth inflation dynamics though some room is available for RBI to go for one more rate cut of 25 basis points in FY20, it will remain data dependent
Sunil Kumar Sinha, Principal Economist, India Ratings