Price pressures on non-volatile items may keep core CPI high

While India's headline retail inflation fell to a three-month low of 6.77% in October, core inflation remained stubbornly stuck at around 6.0%, casting doubt on the Reserve Bank of India's projection that inflation would moderate.

For more than two years, core inflation, which excludes volatile CPI basket items like food and fuel, has remained at or near 6%, showing that the price pressures on non-volatile basket items are still strong.

CPI core inflation averaged 6.1% in Apr-Oct compared with 6.0% in 2021-22 (Apr-Mar) and 5.6% in 2020-21. Economists look at core inflation closely as it indicates underlying inflationary pressures in the economy.

According to economists, inflation in services, which makes up around 80% of the core CPI, is projected to remain high and add to pricing pressures. In a research, Barclays stated that "we expect small price increases to persist among various services such as education and health."

One potential source of upside risk to core CPI is housing inflation as rental inflation, anecdotally, has picked up across key urban areas, it said.

The S&P October services purchasing managers' index said a greater proportion of services companies passed on the increase in cost to clients.

Commodity prices, which make up the other 20% of core, are similarly not anticipated to fall or provide any assistance.

"A deeper dive into the core inflation basket suggests that firms continued to pass on higher input costs to consumers, and the services sector reopening added to price pressures," Nomura said in a report.

Though global commodity prices have come down, they have not shown any moderating impact on core inflation, economists said.

"Volatility in global commodity prices has kept producers wary of pass-through of fall in input prices to the consumers," said Anubhuti Sahay, head of South Asia Economics Research (India) at Standard Chartered Bank.

"While commodity prices are low today, there is an uncertainty that commodity prices might again climb up at a later date."

In sharp contrast to CPI, core inflation in WPI eased to 4.6% in October from 7.0% a month ago.

The transmission of weaker global commodity prices to core CPI inflation will likely be a prolonged process at best, ICICI Securities Primary Dealership said.

Core CPI, which has a weight of over 47% of the overall basket, may prove to be a hurdle in inflation falling substantially below 6% unless food prices fall drastically, economists said.

The RBI has projected CPI inflation to ease to 6.5% in Oct-Dec and 5.8% in Jan-Mar, before falling to 5.0% in Apr-Jun next year.

CPI inflation averaged 7.0% in Jul-Sep, the third successive quarter it stayed above the upper bound of the medium-term target range of 2-6%.

"As core inflation proves sticky, and with food price pressures showing no signs of swift decline, it is likely headline inflation will stay close to 6.5% in Jan-Mar period as well before favourable base effects pull down inflation in Apr-Jun," said Abhishek Upadhyay, a senior economist with ICICI Securities Primary Dealership.

Food prices have remained elevated, primarily on account of a sharp increase in cereal prices, especially wheat. Inflation in cereals was at an over-nine year high of 12.1% in October.

The headline CPI inflation may have fallen below 7% in October, but core inflation suggests that the underlying price pressures have not eased.

With core inflation continuing to be sticky at around 6%, the Monetary Policy Committee of the RBI is unlikely to loosen the grip on policy tightening in December meeting.

With inputs from Agencies.