Worried about high inflation? It’s actually low and that is the REAL reason to worry

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Updated: November 14, 2019 5:31 PM

Core inflation -- inflation excluding food and energy sectors -- remained moderated due to weak demand conditions in the economy.

retail inflation, CPI, consumer price, WPI, wholesale price index, vegetable prices, pulse prices, RBIOverall inflation shot up due to a surge in food prices after the surplus rainfall in August and September, which caused heavy damage to the Kharif crops.

While retail inflation in India touched a 16-month high in October, soaring above the RBI benchmark, a granular reading of the data shows that the core inflation has actually fallen to a record low. And that, not the high headline figure, should be the real reason for worry, as it spells a deep economic slowdown. Core inflation — inflation excluding food and energy sectors — remained moderated to 3.47 per cent amid weak demand conditions in the economy. However, the overall inflation shot up due to a surge in food prices after the surplus rainfall in August and September, which caused heavy damage to the Kharif crops. While the already sagging economy is struggling through an investment crisis, the increased prices may catalyse RBI’s decision to cut rates for the sixth time back-to-back this year in December. Here’s what to expect in the months to come.

Also Read: Retail inflation at 16-month high; crosses RBI’s comfort level at 4.62% in October

Retail Inflation

Credit rating agencies ICRA and Care Ratings believe that the CPI inflation may continue to print higher than RBI’s benchmark of 4 per cent in the coming months of FY20. SBI also believes that retail inflation will be around 4 per cent. The prices of vegetables and pulses rose dramatically by 26 per cent and 12 per cent on-year respectively in October, hence it is believed that the pace of normalisation in vegetable prices will be the key driver of the trend in food inflation over the next few months.

“Going forward, thus, food and vegetable prices could remain elevated and inflation prints in November still may be on a higher side due to the low base in 2018,” SBI research report-Ecowrap said.

Meanwhile, RBI has significantly revised down median forecasts of inflation for 2019-20. The average inflation for 2019-20 was pegged at 4.8 per cent by the professional forecasters, which was revised down gradually to 3.5 per cent in September 2019. CPI Headline inflation is projected at 3.5 per cent while WPI Headline inflation is projected at 1.8 per cent for the current fiscal year. 

Also Read: Wholesale inflation tumbles even as retail inflation shoots up; here’s what upset the maths


While the RBI is consistently trying to reduce interest rates to boost investment, the retail inflation may complicate policy choices in light of the slowdown in economic growth momentum. 

“In our view, the extent to which the second-quarter GDP growth reading eases further from the 5 per cent recorded in the previous quarter, will influence the MPC’s decision on whether to cut rates further and by how much, in the December 2019 policy review,” said Aditi Nayar, Principal Economist, ICRA. 

On the other hand, the low economic growth along with the firming inflation may stop RBI from cutting rates. “We do not expect RBI to go in for a rate cut in the next monetary policy even though growth concerns are sharp,” Madan Sabnavis, Chief Economist, Care Ratings.

However, the SBI is sure that there will be a rate cut in the next monetary policy committee meeting as well. Citing a different report, the SBI Ecowrap report said that the RBI may cut repo rate in the upcoming December monetary policy meeting and may pause thereafter on concerns over inflation.

“We expect a December rate cut, but beyond December it will be a close decision as inflation prints beyond October will remain elevated. Thus, it will be better if the rate cut is front-loaded in December,” the SBI Ecowrap report said.

On the forecast of CPI core inflation, economists differ due to present uncertainties. While ICRA expects the core-CPI inflation to inch up modestly from the level recorded in October 2019, but not breach 4 per cent, the SBI Ecowrap report said that even as food CPI will remain elevated, core CPI will go below 3 per cent in this fiscal year. 

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