Traffic moves along a highway during morning rush hour in India. Photographer: Kuni Takahashi/Bloomberg

CPI Inflation Stays Below 4% As Food Prices Remain In Check

Consumer price inflation rose marginally in September, but remained below the four percent mark. An increase in global crude oil prices compared to last year was balanced out by modest food prices and a decline in housing inflation.

Data released by the Central Statistics Office on Friday, showed that retail inflation was at 3.77 percent in September, compared to 3.69 percent in August. A Bloomberg poll of 39 economists had estimated inflation at 4.02 percent for September 2018.

Inflation Internals

Retail inflation had eased largely dragged due to a decline in food inflation, which has bucked seasonal trends and remain subdued through the summer. In contrast, fuel inflation remains elevated but did not rise any further last month.

  • CPI food inflation rose to 0.51 percent in September from 0.29 percent in August.
  • Fuel and light inflation stood at 8.47 percent in September - the same as in August.
  • Housing inflation stood at 7.07 percent in September 2018, down from 7.59 percent in August 2018.
  • Clothing and footwear inflation was at 4.64 percent, in comparison to 4.88 percent in August 2018.
  • Inflation in the households goods and services segment stood at 4.88 percent, compared to 4.89 percent in August 2018.
  • Inflation in the transport and communication segment came in at 6.42 percent, higher than the 5.97 percent in August 2018.
  • Overall, core inflation was at 5.8 percent.

“The September CPI print was a positive surprise since it was much lower than the street expectations and was assisted by a sharp fall in all food components,” said B. Prasanna, head of global markets group at ICICI Bank.

Given these numbers, we expect the FY19 headline inflation to remain sub 4.5 percent, despite upside risks from high oil prices and impact of the rupee depreciation.
B. Prasanna, Head - Global Markets Group, ICICI Bank.

Actual vs Expectation

While India’s Monetary Policy Committee has been cautioning about upside risks to inflation, actual readings have been below expectations for the last few months.

At its meeting earlier this month, the MPC projected inflation at 3.9-4.2 percent in the second half of the current fiscal but once again warned of upside risks that could emerge from higher fuel prices, a weaker rupee and increased support prices for farm crops.

In response to these risks, the MPC changed it’s monetary policy stance to calibrated tightening, even though it did not hike rates. This was done with an intention to anchor inflation to near the 4 percent mid-point of the MPC’s inflation target of 4 (+/-2) percent. The MPC has raised rates twice this year by a cumulative 50 basis points to 6.5 percent.

“While the present inflation trajectory is in line with the RBI’s inflation targeting approach, the likelyhood of inflation touching around 5 percent in Q4 FY19 is high,” said Devendra Kumar Pant, chief economist at India Ratings. “We accord a high probability of one more rate hike this fiscal,” Pant added.

CPI Inflation Stays Below 4% As Food Prices Remain In Check