CPI Inflation Falls For The First Time In 6 Months In July As Demand Moderates Further

After consistently rising since January this year, retail inflation saw a moderate dip for the first time due to weak demand conditions in the economy. Inflation in food and beverages softened while it contracted in fuel and light.

Consumer Price Index inflation stood at 3.15 percent in July 2019 compared to 3.18 percent in the previous month, according to data released by the Ministry of Statistics and Program Implementation on Tuesday.

A Bloomberg poll of 40 economists had estimated inflation at 3.09 percent for July 2019.

While inflation fell last year because of declining food prices, the recent moderation is because of slowing demand in rural and urban areas. Retail inflation continues to remain well within the target of 4 percent while economic growth has slowed.

“Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate,” according to the Monetary Policy Committee’s statement on Aug. 7, 2019. The policy repo rate has been pared by a cumulative 110 basis points in 2019 with a cut of 35 basis points in the MPC’s last meeting.

Inflation Internals

• Rural inflation stood at 2.19 percent as against 2.21 percent in June 2019.
• Inflation in urban areas stood at 4.22 percent, compared to 4.33 percent in the previous month.
• Food and beverages inflation was at 2.33 percent from 2.37 percent in June 2019.
• Clothing and footwear inflation was at 1.65 percent as against 1.52 percent in June.
• Fuel and light inflation contracted by 0.36 percent compared to 2.32 percent last month.
• Housing inflation stood at 4.87 percent in July compared to 4.84 percent in June.
• Inflation in household goods and services grew by 4.04 percent as against 4.28 percent in June.

According to Aditi Nayar, principal economist at ICRA, the incoming trends in food prices need to be cautiously watched, following the recent flooding in some states, rising vegetable prices, continued lag in Kharif sowing and an unfavourable base effect.

The CPI inflation trajectory may allow for a 15 basis points rate cut in October 2019 after monsoon related uncertainties get resolved, especially if crude oil and other commodity prices remain relatively soft, Nayar said.

Core Inflation Sees An Uptick

Core inflation—which excludes food, fuel and light—rose to 4.3 percent, from 4.1 percent in June, recording an uptick for the first time since October last year.

Soumya Kanti Ghosh, chief economic advisor at State Bank of India, believes that this a temporary phenomenon. “Core inflation will ease going forward and converge towards headline CPI,” Ghosh said.