New Delhi: Headline retail inflation likely bottomed out in January and is seen rising to 2.57% in February. The rise would be the first in five months. More importantly, Consumer Price Index (CPI) inflation will remain below the Reserve Bank of India’s (RBI) medium-term target of 4.0% for the seventh consecutive month. In fact, if the RBI’s inflation forecasts are anything to go by, CPI inflation may not exceed 4.0% until the final months of 2019.
While an unfavourable base effect will help in pushing inflation higher in February, there seems to be no end in sight for one of the primary reasons behind its current decline – subdued food prices. Govt data shows that retail prices of onion and potato declined 9% and 5% month-on-month, respectively, in February, while tomato prices fell 5% following a 6% sequential rise in January. Even wholesale prices of the three vegetables, which are a leading indicator of retail prices, continued to move southward, falling 6-15% month-on-month in Feb.
The RBI had warned of the risks of high food inflation spilling over into other components of the CPI. It is this generalisation which the central bank has worked to prevent, increasing the policy rate when appropriate and not at the first sign of higher food prices. Admittedly, some of the ongoing food price fall is down to excess supply of several items. However, that does not change the fact that the easing cycle initiated by the MPC in February if it is a cycle at all, is because a factor monetary policy can’t really control directly.
Despite the future of food prices being as certain as the British weather, rate cut expectations for the April meeting of the RBI’s Monetary Policy Committee are building. Just how certain is the MPC that food prices will remain subdued for the rest of the year? Not very. “If the momentum of food price changes in the next few months indicates that inflation is likely to rise above 4% and persist in the upper reaches of the tolerance band, pre-emptive action will be warranted to ensure that the primary objective of maintaining price stability is defended and achieved lastingly”, Michael Patra, one of the four members who voted for a rate cut on Feb 7, said last month.
Unless the fall in food prices continues unabated, we might see another quick reversal in the RBI’s policy stance, if not the trajectory. For now, food inflation conundrum still is a puzzle.
Retail inflation rises to 4-month high
New Delhi: Retail inflation rose to four-month high of 2.57 per cent in February, mainly driven by higher food prices. The retail inflation based on Consumer Price Index (CPI) stood at 1.97 per cent in January and 4.44 per cent in February 2018. Food inflation based on CPI, however was in negative at 0.66 per cent. The latest print is higher than (-) 2.24 per cent in January. The Reserve Bank factors in retail inflation while deciding at its monetary policy.
