Despite the high inflation rate, what came as relief earlier was the low core inflation (inflation excluding food and energy prices).
Rising food inflation, especially in the prices of onion, has already elevated the CPI inflation rate to a 6-year high but the food prices are not the only reason behind it now. Despite the high inflation rate, what came as relief earlier was the low core inflation (inflation excluding food and energy prices) and the hope that food prices will gradually come down after a bumper Rabi production. However, in the month of January, the core inflation also shot up, crushing the optimism on CPI inflation. After touching a record low of 3.5 per cent in October19, core inflation is rising and hit a 5-month high of 4.2 per cent in January 2020.
The rise in core inflation was also against the street estimates as the economic activity has slowed down. “Despite the sluggish economic activity, core inflation rose further, led by a pickup in personal care segment (7.2 per cent)—largely reflecting 4.4 per cent on-month increase in gold prices on the back of flight to safety, given spread of Covid-19 disease (coronavirus), said the Kotak Economics Research. Inflation across the transport and communication segment rose to 6.1 per cent (5 per cent in December), partly reflecting the spillover from telecom tariff hikes, it added.
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Meanwhile, despite the buffer stock norm of 30.7 million tonnes of rice and wheat, total central pool stock was 56.4 million tonnes as on 31st Dec’19, but that has not prevented cereal prices to jump. Even the contribution of core inflation items (driven by telecom tariff jump) was around 56 basis points and the contribution of fuel was around 41 basis points, thus, inflation seems to be becoming broad-based, said the SBI Ecowrap report.
Altogether, relief from rising prices doesn’t seem to come in the next two months. “Inflation is expected to remain high next two months, close to 7 per cent thus averaging above 7 per cent for Q4 FY20. Inflation will slide down gradually in FY21 and could slide to less than 3% in December’20,” the SBI Ecowrap report added.