A vendor sorts vegetables at a market stall in the suburb of Bandra in Mumbai. (Photographer: Karen Dias/Bloomberg)

CPI Inflation Falls To 3.69% In August As Food Prices Remain In Check

Consumer price inflation fell below 4 percent for the first time in 2018, as prices of vegetables and pulses remained in check even as fuel prices rose. The lower than expected inflation reading complicates the task for India’s Monetary Policy Committee, which may see the need to hike rates in response to a weaker rupee when it meets next in October.

Data released by the Central Statistics Office on Wednesday, showed that retail inflation was at 3.69 percent in August compared to 4.17 percent in July. A Bloomberg poll of 41 economists had estimated inflation at 3.77 percent for August 2018.

Inflation is currently running below the MPC’s forecast of 4.6 percent in the second quarter of the current financial year. The MPC has a mandate of maintaining inflation in a band of 4 (+/-2) percent.

Inflation Internals

Inflation fell further as prices of vegetables and pulses fell sharply compared to last year. Higher inflation in the fuel and light category, however, balanced out the fall to some extent.

  • CPI food inflation stood at 0.29 percent in August compared to 1.37 percent in July.
  • Within the food basket, vegetable inflation fell to -7 percent from -2.19 percent in July.
  • Prices of pulses and products fell, with the inflation rate falling to -7.76 percent from -8.91 percent in July.
  • Fuel and light inflation stood at 8.47 percent in August up from 7.96 percent in July.

Fuel inflation readings continue to remain elevated because of the increase in global crude oil prices compared to last year. The central bank had earlier said that it expects crude oil to average $68 a barrel for the fiscal year 2018-19. Prices have stayed above that level. The weaker rupee and high taxes have added to the pain with prices of retail fuel products like petrol and diesel ruling at record highs.

Consumer food inflation came in at 13 months low at 0.29 percent, this was primarily due to decline in inflation of fruits (declining from May 2018), deflation in vegetables (second consecutive month) and continued deflation (21 consecutive months) in pulses. Fuel and light inflation at 8.5 percent was highest in last 60 months.
Devendra Kumar Pant, Chief Economist, India Ratings and Research

Among the core inflation categories:

  • Housing inflation fell to a nine-month low of 7.59 percent in August 2018 from 8.45 percent in July 2018, partly due to base effect.
  • Clothing and footwear inflation was at 4.88 percent in comparison to 5.67 percent in July 2018.
  • Inflation in the households goods and services segment stood at 4.89 percent compared to 5.18 percent in July 2018.
  • Inflation in the transport and communication segment fell to near 6 percent from 6.18 percent in July 2018, showed the data.
The moderation in the core inflation to 5.9 percent in August 2018 was broad-based, which is a positive sign.
Aditi Nayar, Principal Economist, ICRA

Despite the lower than expected inflation, economists are fearing a third rate hike at the October monetary policy review.

Unless crude oil prices recede and the rupee appreciates, the scales are tipped in favour of a third consecutive rate hike in October 2018, a decision that is unlikely to be unanimous among members of the MPC, said Nayar.

Robust GDP growth along with a declining inflation trajectory and relatively stable IIP growth should prompt the MPC to hold policy rates, said Pant. However, he added that the possibility of a rate hike this fiscal can’t be ruled out due to weakness in the rupee and the global markets.