India’s retail inflation hit 5.11% in January, compared with 4.28% in the previous month, as the government changed the methodology as well as the base year for calculating the Consumer Price Index (CPI), reports fe Bureau in New Delhi. Economists, who were expecting the January figure to be higher after the composition of the basket changed with higher weights ascribed to services and other core items, have predicted the average retail inflation rate during 2015 to be 5-5.3%, much lower than the level feared by the Reserve Bank of India. They expect the repo rate to be cut 50-70 basis points through March 2016 from the current 7.75%.
The Central Statistics Office said on Thursday the base year for the CPI has been changed to 2012 from 2010, and the revised series captures the price situation on the basis of the consumer expenditure survey of 2011-12 instead of 2004-05 used in the earlier series so that latest consumption pattern is reflected more accurately in the data.
Consequently, the composition of various items has been tweaked, with less weight to non-core products such as food and beverages and fuel, while that of housing, clothing and miscellaneous items has been raised in the new series. While higher weight of miscellaneous items is expected to capture inflation in services better, a greater focus on core items may help the revised CPI become a better gauge for monetary policymaking.
According to the old estimate, retail inflation in December was 5%, which has come down to 4.28% in the new series. Core CPI inflation dropped at a sharper pace in January to 3.94% in January, from as much as 5.4% in December (according to the old estimate), which suggests services inflation was slower than food inflation. The RBI’s CPI inflation target of 8% for January 2015 is way above the rate announced on Thursday.
Wholesale Price Inflation, which is still computed by the old series and awaiting a revision in the base year, hit 0.11% in December, after hitting zero — its lowest in five and a half years — in the previous month.
Although most analysts aver that inflation’s back has been broken, some, especially those in government, still warn that if the economy starts picking up strongly in terms of volume of output, it could create some upward pressure on food prices.
“While the new GDP series reveals a stronger-than-expected recovery, the new CPI series points to duller inflationary pressures. Nevertheless, in our view, repo rate cuts are unlikely to exceed 50 bps over the next few quarters. Moreover, the likelihood of a rate cut prior to the April 2015 policy meeting appears low,” said Aditi Nayar, senior economist at Icra.
The number of items in the CPI basket has been raised to 448 from 437 in the rural and 460 from 450 in the urban and all-India levels. Instead of five subgroups, the new series has six subgroups of items (products such as food, beverages, paan, tobacco and intoxicants have been split into two subgroups by separating food and beverages from the rest). Moreover, prices of food items under the Antyodaya Anna Yojana have also been included in the new series, in addition to the earlier practice of using the price data for supplies to people above as well as below the poverty lines.
Although the January CPI inflation is more or less in step with expectations, analysts reckon price pressure in food items could increase once the economy starts picking up due to a rise in output. They expect the average CPI inflation for the next year to be in the range of 5-5.3%, much lower than previously assumed. Having hit a record 11.2% in November 2013, CPI inflation has been slowing almost steadily, partly due to favourable bases. However, analysts had viewed inflation could pick up once the base effect wears off from December 2014.
The CSO had on January 30 changed the base year as well as methodology for computing national income and on Tuesday estimated economic growth for 2014-15 at 7.4%, much higher than any projections earlier that used the old series, including 5.5% by the RBI. This has baffled many economists who sought to point at other important indicators that suggest a different picture of the economy.