Decline in food inflation is positive in the Indian economy

Headline CPI (consumer price index) inflation dipped to 3.2% in January led by large dip in food inflation caused again by drops in prices of vegetables and pulses. On the other hand, core inflation increased on the back of higher fuel prices. It is believed that headline retail inflation could move up over the next few months, probably clawing back to the 5% zone by the end of FY18, according to a research note from IDFC Bank. The current prognosis of Headline WPI (wholesale price index) inflation therefore, is unlikely to provide further scope for the RBI (Reserve Bank of India) to turn dovish.



The decline in food inflation was led by lower prices of certain food items such as vegetables and pulses. While vegetable prices declined by 4.7% month-on-month compared with 11.7% mom decline in December, pulses prices dropped by 5.5% mom compared with a decline of 1.7% in December. On a year-on-year basis, vegetable prices declined 15.6%, compared with a 14.6% decline in December. While a part of the drop is attributable to seasonal factors, demonetisation possibly had also played a part with lower currency availability leading to lower off-take from the farm gate.  The only category within food which is seeing some upward pressure is sugar. 



Core inflation at 5.1% was higher than the December print of 4.9%.  Thus, the RBI was probably justified in highlighting that the sticky core could be a principal worry in the medium term.  As expected, the increase in core was led by transport & communication index which showed an uptick on the back of increase in retail price of petrol and diesel. With oil prices sustaining at current levels, some pass-through of higher fuel prices will be visible in the economy, pointed out the research note.



From an inflation targeting mandate, the RBI is intended on moving inflation to a durable level of 4%, concludes the research note.


Source: Moneylife