Amid low commodity prices and weak private consumption, economists expect core consumer price index (CPI) inflation to decline further in the near term and possibly even fall below the 3% mark in May. “The current sequential momentum in core CPI has weakened to about 0.2% m-o-m in seasonally adjusted terms. This, if it continues for the next few months, can see core inflation fall below 3% in May 2024,” said Dhiraj Nim, economist, ANZ Banking Group. “I expect a gradual fall to about 3% or slightly lower in the next four months.”
In February, core inflation — which excludes food and fuel components in the CPI basket — stood at 3.3%, the lowest in the current series with base year 2012. Since December, it has stayed in the 3% range. One reason for the decline could be linked to the high base effect, given that core inflation had averaged 6.1% in FY23. However, the continuous fall also reflects underlying weaknesses in demand conditions, partially due to the monetary policy measures taken by the RBI. Since February 2023, the central bank has kept the policy repo rate unchanged at 6.50%.
“The (declining) momentum along with the base effect remain supportive of core staying around 3%,” said Garima Kapoor, economist, Elara Securities. “In April, normally core prices rise sharply due to adjustment to the housing index (in CPI), which then normalises in May. Thus, the possibility of sub-3% core print is highest in May.”
Most economists expect core inflation to average 3-3.1% in March-June, and then rise from July onwards, albeit slowly. July is seen as the month for core’s trajectory to reverse, as the base effect will turn unfavourable. Core inflation in July 2023 had fallen below 5% for the first time in 39 months, and since then it has only recorded a gradual decline.
The anticipated reversal in trend from July is, however, seen to be slow as producers aren’t facing any cost push pressures anymore and their profit margins have normalised, say economists. Until input prices rise sharply, the probability of a pass through will not arise. The inflation of ‘manufactured products’ — a group within the WPI basket reflecting input price pressures — has stayed in the negative territory for 12 consecutive months. In February, the group’s inflation had edged down to a six-month low of (-)1.27%.
That said, fast moving consumer goods (FMCG) firms have indicated that they may hike prices by 2-3% in the second half of FY25, on account of volatile commodity prices — notably of food and crude oil — and wage inflation. Small, calibrated price hikes may also boost price-led growth, which has been flat to negative for most firms through FY24.
Earlier this month, Harsh Agarwal, vice-chairman & managing director at Emami, had told FE that there could be price hikes of 1.5-3% next year in the personal care and healthcare categories. “Price hikes could happen in the second half of FY25 as the FMCG market may stabilise by then from the demand perspective.”
