Analyst corner | Core inflation expected to stay low for next 3-4 months

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New Delhi | Published: June 25, 2019 1:50:15 AM

Out of the 65bps sequential rise in food inflation in May ‘19, vegetables, pu-lses and sugar contributed 34bps, 15 bps and 5 bps respectively.

inflation, economy, india economy, core inflationShowing a contradictory trend to headline, core inflation eased to 4.2% from 4.5% in April.

Headline inflation for May ’19 came in at 3.05% (I-Sec est: 3.07%, Consensus: 3.1%). Although this is sharply lower than 4.87% 12 months ago, in sequential terms inflation increased from 2.99% in Apr 19. This is the fourth consecutive month-on-month increase in inflation, taking the 3mma inflation to 2.97%. As expected, risi-ng food prices accounted for the entire sequential increase in CPI. Food and beve-rages inflation inched up to 2% (1.35% in Apr), contributing 93bps to headline infla-tion. In line with past few months, three items viz. vegetables, pulses and sugar accounted for most of the increase in food inflation. Out of the 65bps sequential rise in food inflation in May ‘19, vegetables, pu-lses and sugar contributed 34bps, 15 bps and 5 bps respectively. But falling prices of ‘miscellaneous’ items cushioned the imp-act of rising food prices to some extent.

Showing a contradictory trend to headline, core inflation eased to 4.2% from 4.5% in April. This is the 7th consecutive decline in core inflation. Almost all components of core basket recorded softening inflation. The largest drop came from ‘transportation and communication’ inflation followed by ‘household goods and services’ and healthcare costs. Softening core inflation is in line with the current economic slack. We expect economic growth to remain soft in H1FY20, hence core inflation is also expected to remain low for next 3-4 months.

According to the MPC’s latest forecast, inflation is expected to average 3-3.1% in H1 and 3.4-3.7% in H2FY20 (FY20 full year 3.3%). However, we expect actual inflation to come in 50bps higher than the committee’s forecast. The MPC seems to have underestimated inflation especially in H2. Our projected inflation trajectory shows that CPI is likely to average 3.3% in H1 and 4.2% in H2 taking the full year average to 3.8%. Food prices could inch up faster than the committee’s expectations, especially if monsoon precipitation is lower.

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