A customer pays for vegetables at a stall in Varanasi. (Photographer: Dhiraj Singh/Bloomberg)

CPI Inflation Falls To An 18-Month Low

Consumer price inflation fell to its lowest in 18 months in December 2018 following a persistent decline in food prices and a drop in fuel costs. The easing price pressures, together with moderating growth, may prompt a rethink on interest rates when the Monetary Policy Committee meets next month.

Retail inflation fell to 2.19 percent in December compared with 2.3 percent in November, government data released on Monday showed. A Bloomberg poll of 36 economists had estimated inflation at 2.2 percent for December 2018.

Retail inflation has fallen to its lowest level since June 2017 and is just above the lower end of India’s inflation target of 4 (+/-2) percent. WPI Inflation, released earlier on Monday, fell to 3.8 percent compared to 4.64 percent in November 2018.

Inflation Internals

The fall in headline inflation continues to be driven down mostly by uncharacteristically low food prices. Core inflation, while flat, has not shown a significant decline, leaving policy makers to debate whether the low inflation period will last.

  • CPI food price index fell 2.51 percent in December over last year, after contracting 2.61 percent in November. This is the third consecutive month of negative inflation in this category.
  • Fuel and light inflation fell to 4.54 percent, down from 7.39 percent in November.
  • Housing inflation stood at 5.32 percent compared to 5.99 percent in November.
  • Clothing and footwear inflation was at 3.52 percent compared with 3.53 percent in November 2018.
  • Inflation in the households goods and services segment stood at 6.38 percent, compared with 5.80 percent in November 2018.
  • Inflation in the transport and communication segment came in at 4.30 percent, lower than 6.09 percent in November 2018.
Headline CPI came close to expectations at 2.2 percent. This was led by continued deflation in food group while the broad-core index threw up a negative surprise with core inflation remaining at 5.7 percent. Despite the sharp fall in petrol and diesel prices in December, the core inflation was elevated. This was due to the high sequential inflation seen in health and education sub-groups.
B Prasanna, Head - Global Markets Group, ICICI Bank

Growth-Inflation Variance

The rise in core CPI appears to be at odds with economic growth, said Soumya Kanti Ghosh, chief economic adviser at State Bank of India. He said that the rise in core CPI inflation is led by growth in health and education, which rose 9 percent and 8.4 percent, respectively. “Both these items have seen higher growth in rural areas at a time when rural demand is collapsing.”

The recent GDP advance estimates indicate demand moderating in the second half of FY19, reflecting in automobile sales and consumption of petroleum products. The estimates also indicate a moderation in private and government expenditure growth.

Interest Rate Outlook

The latest inflation reading will fuel calls for a change in stance by the MPC which meets on February 5 for its last review of the current financial year. The MPC has already pegged down its inflation forecast for the current financial year but retained a ‘calibrated tightening’ stance. It has raised rates two this fiscal year by a total of 50 basis points.

Some economists are now calling for rate cuts as early as February or April.

“The foreseeable inflation trajectory should pave way for the RBI to change it’s stance from calibrated tightening to neutral, along with making the case for a rate cut,” Shubhada Rao, chief economist at Yes Bank told BloombergQuint ahead of the release of inflation data.

According to Rao a change in stance and a rate cut are unlikely in the same meeting but added that it can’t be ruled out. Kotak Institutional Equities, expects a 50 basis points rate cut only in the first half of FY19.

“We continue to expect the monetary policy committee to change the stance to neutral in the February policy and remain on an extended pause on policy rates,” said B Prasanna.