CPI: Retail Inflation Rises To 16-Month High

India’s retail inflation rose to the highest in 16 months, as food prices spiked due to unseasonal rains which disrupted supplies of vegetables. However, core inflation, which reflects demand in the economy, fell sharply due to weak economic conditions.

Consumer Price Index inflation rose to 4.62 percent in October compared to 3.99 percent in September, according to data released by the Ministry of Statistics and Program Implementation on Wednesday. A Bloomberg poll of 34 economists had estimated inflation at 4.35 percent for October.

Food and beverages inflation rose to 6.93 percent in October. Prices of vegetables and pulses rose the most among that category. However, core inflation fell to 3.44 percent—the lowest in the current inflation series—compared to 4.02 percent last month.

Most economists see the increase in inflation as temporary and expect average retail inflation to remain below 4 percent in the current financial year. As such, the pick-up in inflation is unlikely to sway the decision of India’s Monetary Policy Committee, which meets in early December. Weakness in the economy will likely prompt the committee to cut rates once again despite inflation temporarily breaching the mid-point of India’s inflation target 4 (+/-2) percent.

This is the first time since August 2018 that inflation has moved above the 4 percent mark.

Inflation continues to see divergence in sub components, with food prices moving up, while core inflation dropped to its lowest in more than a decade, said Rahul Bajoria, chief India economist at Barclays.

Inflation Internals

• Rural inflation stood at 4.29 percent in October as against 3.24 percent in September.
• Inflation in urban areas stood at 5.11 percent, compared to 4.78 percent last month.
• Rural food inflation rose to 6.42 percent in October compared to 3.22 percent last month.
• Urban food inflation jumped to 10.47 percent in October compared to 8.76 percent in September.
• Clothing and footwear inflation was at 1.65 percent, compared to 0.96 percent in September.
• Housing inflation stood at 4.58 percent in October compared to 4.75 percent in September.
• Fuel and light inflation stood at -2.02 percent compared to -2.18 percent in September.

Much of the increase in inflation is to be blamed on higher food prices. Within the food and beverages category, vegetable inflation surged to 26 percent. Inflation in the pulses category stood at nearly 12 percent in October. Meat, fish and eggs, too, are seeing higher inflation levels.

Food inflation may remain elevated in November as high frequency information doesn’t show any signs of prices cooling off, said Bajoria. The extended monsoon has led to a delay in crop arrivals in wholesale markets, a trend especially visible in perishables where crop arrivals at mandis (markets) have lagged past year trends, he said. While food inflation may prove to be sticky, low core inflation will help keep inflation sub-4 percent in the coming quarters, said Bajoria.

Core Inflation Plummets

While headline inflation rose due to an increase in food prices, core inflation plummeted further.

In October, core inflation fell to 3.44 percent compared to over 4 percent in September. The falling inflation level in this category is a reflection of the weak demand conditions prevailing in the economy, said Rao.

GDP growth in India fell to a six-year low of 5 percent in the first quarter of the current financial year and is expected to weaken further in the second quarter. The weaker demand has reduced pricing power and brought down core inflation.

WATCH | CPI Inflation rose by 4.62% in October

Will Higher Inflation Give MPC Reason To Pause?

Despite higher inflation, most economists expect the MPC to keep cutting rates. The benchmark repo rate has already been cut by 135 basis points so far this year.

Even though inflation has moved above the RBI’s forecasts, we expect the Q2 FY20 GDP data to prod the MPC to see through above-target inflation and ease rates by 25 basis points next month, said Radhika Rao, economist at DBS Bank.

DK Josh, chief economist at Crisil, also expects another 25 basis point cut in rates in December. “The rise in CPI inflation is largely due to an idiosyncratic factor—a surge in prices of vegetables, especially onion and tomato. This should correct going ahead,” Joshi said. He said the weakness in demand is reflected in a sharp slide in core inflation in October, which is the lowest in the last eight years.

However, Madan Sabnavis, chief economist at CARE Ratings, said that, logically, the MPC must now pause its interest rate cutting cycle. Despite the change in the MPC’s goal posts to revive growth, it should wait for inflation trends in the coming months, he said.