1. Retail inflation hits record low of 2.8 percent in May as food inflation touches -1.05 per cent

Retail inflation hits record low of 2.8 percent in May as food inflation touches -1.05 per cent

Retail inflation hit a record low of 2.18% in May, mainly as food inflation touched a fresh low of -1.05%, partly reflecting the crash in prices of farm items following a good harvest.

By: | New Delhi | Updated: June 13, 2017 7:12 AM
Retail, inflation, Retail inflation, food inflation, good harvest With the real interest rate touching a 15-year high in 2016-17, the latest moderation in inflation (albeit aided by a favourable base effect) bolsters the case for a rate cut. (Reuters)

Retail inflation hit a record low of 2.18% in May, mainly as food inflation touched a fresh low of -1.05%, partly reflecting the crash in prices of farm items following a good harvest. With the real interest rate touching a 15-year high in 2016-17, the latest moderation in inflation (albeit aided by a favourable base effect) bolsters the case for a rate cut. It also brings to the fore the “plausible alternative macroeconomic assessment” put out by chief economic adviser Arvind Subramanian after the Reserve Bank of India’s monetary policy committee (MPC) decided to keep key policy rates unchanged last week: “(the RBI’s) inflation forecast errors have been large and systematically one-sided in overstating inflation”. He said not just headline CPI but even core inflation has dropped substantially in recent months.

The data released on Monday showed core inflation, too, dropped from 4.5% in April to 4.3% in May, recording a broad-based slowdown sequentially, with even services such as education, health and housing showing moderation. It was as much as 4.9% in March. Last week, the RBI trimmed its inflation forecasts for 2017-18. It projected headline CPI inflation at 2-3.5% for the first half of 2017-18 and 3.5-4.5% in the second half. In the April policy review, however, the RBI had forecast retail inflation to average 4.5% in the first half of 2017-18 and 5% in the second half. Analysts say the latest downward revision suggests the RBI may be accommodative on the future course of rates in a bid to prop up growth.

“Following the record harvests in 2016-17, the timely onset to the monsoon has eased concerns related to the trajectory of food inflation. However, the continued dip in reservoir levels, extent of revision in MSPs and stickiness in rural wages remain modest inflation risks,” said Aditi Nayar, principal economist at Icra. But, overall, the trajectory for food inflation is expected to be relatively benign in the first half of this fiscal, which may soften inflationary expectations going ahead, she added. The positive base effect for food inflation is expected to continue till July 2017.

Two of the key contributors to the plunge in food inflation in May were vegetables (-13.44%) and pulses (-19.45%). “While pulses deflation is more structural in nature, the vegetable deflation could be cyclical and can change its course in near future due to monsoon-related aspects. While decline in food inflation is good news for policymakers and consumers, it is not very good news for farmers and especially vegetable and pulses farmers,” India Ratings said in a report. Analysts, however, added that a reversal of the favourable base effect could result in food and headline inflation rising sharply, and exceeding 4% during the second half of this fiscal.

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