Is Rural Inflation Data Sending Out Mixed Signals?
The persistent fall in food prices has been seen as an indicator of stress in the rural economy. Lower food prices are capping farm incomes, which in turn could impact demand for goods and services more broadly. But just when you thought that signals from the inflation data were clear enough to warrant a policy response, you get other indicators to the contrary.
Rural core inflation, which excludes volatile items like food and fuel, has been rising even as overall inflation in rural areas has been sliding.
“Rural headline inflation slumped to 1.65 percent in December 2018 led by a contraction of 2.8 percent in the rural consumer food price index. However, core rural CPI has jumped to 6.34 percent even as urban core inflation has declined to 5.26 percent in December on an annual basis,” pointed out Soumyakanti Ghosh, chief economist at State Bank of India in a report.
Is this suggesting that rural demand conditions are not as weak as anticipated?
Ghosh believes the answer may be both fundamental and technical.
The jump in health inflation is led by higher hospital and nursing home charges which rose 11.27 percent in December 2018 over last year. Medicine and medical expenses also rose to 10 percent and 7.5 percent respectively.
The other component which has seen an increase in inflation is education.
Rural education inflation rose by 9.98 percent in rural areas in December 2018 in comparison to 7.2 percent in urban areas in December 2018 on an annual basis.
Higher coaching fees in private tutors and institutes and higher cost of books and journals could have led to higher inflation in this segment, said Ghosh.
Ghosh argued that along with fundamental factors, technical factors may also be impacting the inflation readings.
Collection in rural areas now takes place by the National Sample Survey Office (NSSO) itself, as against the earlier practice of collecting data through post offices, said Ghosh. The organisation’s regional offices handle this added work with the same infrastructural setup and this may take some time to stabilise, causing the data aberration, he said.
Additionally, data collected by post offices earlier was validated by the NSSO. Now the lack of this validation may be leading to some data discrepancies. A possible change in specification of products could also be leading to change in figures.
These discrepancies in data could obfuscate policy choices, cautioned Ghosh. Policy choices need to be made on the basis of methodologically consistent inflation data.
Data currently indicates that the MPC may change stance from calibrated tightening to neutral in February, paving way for a possible rate cut in April if the MPC goes by inflation data. However, with core inflation remaining sticky, a rate cut may not be a given.