Trailers and trucks laden with onions stand at the APMC wholesale market in this aerial photograph taken in Lasalgaon (Photographer: Dhiraj Singh/Bloomberg)

CPI Inflation Eases Further To 2% On Falling Food Prices

Retail inflation in India dropped further in January on falling food and fuel prices. The inflation rate for services like education and health also fell, bringing down the level of core inflation, after excluding volatile items like food and fuel.

Retail inflation stood at 2.05 percent in January 2019 compared with a revised 2.11 percent in December 2018, according to data by the Ministry of Statistics and Program Implementation. A Bloomberg poll of 38 economists had estimated inflation at 2.5 percent for January 2019.

At just above 2 percent, CPI inflation is now at the lower bound of India’s inflation target of 4 (+/-2) percent. The lower-than-expected inflation prompted the Monetary Policy Committee to cut interest rates by 25 basis points for the first time in 18 months last week.

At 2.05 percent, CPI for January  is at a 19-month low. Extended winter remains supportive of decelerating food prices. The fuel component, too, has surprised on the downside. This along with core inflation at 5.36 percent presents a scenario of CPI inflation between 2-3 percent over the next 5 months.This raises the probability of rate cut(s) in April and beyond too.
Shubhada Rao, Chief Economist, Yes Bank
CPI Inflation Eases Further To 2% On Falling Food Prices

Inflation Internals

  • CPI food inflation stood at -2.17 percent in January compared to -2.51 percent in December.
  • Fuel and light inflation stood at 2.2 percent as against 4.54 percent in December.
  • Housing inflation stood at 5.2 percent compared to 5.32 percent in December.
  • Clothing and footwear inflation was at 2.95 percent stood at 3.52 percent in December 2018.
  • Inflation in the households goods and services segment rose to 6.45 percent compared with 6.38 percent in December 2018.
  • Inflation in the transport and communication segment came in at 3.44 percent, lower than 4.30 percent in December 2018.
  • Health inflation fell to 8.93 percent in January compared to 9.02 percent in December 2018.
  • Inflation in the education segment fell to 7.99 percent compared to 8.38 percent in December 2018

Low Food Prices Persist

Headline inflation in India has been pulled down to a large extent by low food prices. In January, food disinflation, or a fall in food prices, persisted for the fourth consecutive month. Food inflation has fallen from double digits just five years ago to below zero now.

Much of the current fall in food inflation is being driven by the vegetables segment, where inflation stood at -13.32 percent in January compared to -16.14 percent in December. Prices of fruits, eggs, sugar and confectioneries are also continuing to fall on a year-on-year basis.

About a third of the fall in food prices is structural and could persist for an extended period of time, said Prachi Mishra, chief India economist at Goldman Sachs in an interview with BloombergQuint.

Our analysis suggests that one-third of the food disinflation is durable. These durable factors include pro-active food management from the government, including attempts to push up production of items like pulses. There has also been increased availability of inputs like fertiliser. All these factors have contributed to some fraction of the food price fall being durable. 
Prachi Misha, Chief India Economist, Goldman Sachs

Core Inflation vs Headline Inflation

With lower food prices driving the downside in headline inflation, economists have been focused on the relatively elevated levels of core inflation. In particular, inflation in some categories of services such as health and education has risen, confounding economists.

In January, core inflation also eased to about 5.36 percent.

The monetary policy committee, in its February meeting, made it clear that it would target headline inflation as per its legal mandate. The committee expects inflation to stay between 3.2-3.4 percent in the first half of FY20 and at 3.9 percent in the third quarter of next financial year.

Inflation continues to surprise on the downside. The headline number remains below the target of the central bank. Even as services inflation remains high, it is really the headline reading which is likely to determine how the RBI responds in the next policy. We expect one more 25 basis point rate cut by the RBI in the April monetary policy meet.
Tushar Arora, Senior Economist, HDFC Bank