No broad-based decline in core inflation

Wholesale Price Index-based inflation fell to a 58-month low of 3.7 per cent in August, owing to a sharp decline in inflation for food and fuel articles.

Primary food inflation fell 3.3 percentage points to 5.2 per cent due to a fall in the prices of vegetables, and egg, meat & fish.

Fuel inflation declined about three percentage points to 4.5 per cent, as petrol prices fell due to a decline in crude oil prices, while electricity prices rose marginally on the back of a high base.

By contrast, core inflation, an indicator of demand-side pressure on prices, fell, albeit marginally.

Non-food manufacturing inflation, the Reserve Bank of India’s measure of core inflation, fell to 3.5 per cent from 3.6 per cent in July.

The broad-based decline in core inflation seen last month wasn’t sustained in August.

In fact, inflation was seen rising in categories such as chemicals, non-metallic mineral products and machinery, though its impact was offset by lower inflation for basic metals and textiles, which together account for a third of core inflation.

For August, the CRISIL core inflation indicator, an alternative measure of core inflation (calculated by removing metal prices from the prices of manufactured articles), stood at 3.6 per cent, a tad higher than RBI’s measure.

The reason metals are excluded from the CCII is their prices are usually determined by changing global demand-supply dynamics and volatility

in the exchange rate, rather than domestic conditions alone.

In August, inflation for basic metals fell to 2.1 per cent from 2.8 per cent in July, with ferrous and non-ferrous metals inflation easing to 2.4 per cent from 2.6 per cent in July.

As the downward pressure from metals isn’t captured in the CCII, core inflation, as measured by the CCII, was higher than that measured by the non-food manufacturing index.

Also, unlike in RBI’s measure of core inflation, the CCII includes manufactured or processed food prices, as these reflect the second-round impact of inflation in primary food articles and, therefore, capture domestic demand-side pressures in the economy.

As inflation for primary food articles fell sharply to 5.2 per cent in August, manufacturers of food articles seem to have passed on the fall in costs to consumers.

Consequently, manufactured food inflation fell to 3.4 per cent from 4.1 per cent in July. This led to a decline in the CCII (it stood at 3.8 per cent in July.

The upside to the CCII will be capped, as an economic recovery remains fragile and risks of a deficient monsoon have declined in recent weeks, moderating risks of a surge in food inflation.

Despite this, we do not expect a repo rate cut in RBI’s monetary policy review scheduled for the end of this month.

The declining momentum in inflation, especially in retail inflation and inflationary expectations, has to be maintained.

Through retail inflation fell to 7.8 per cent in August, it remains close to RBI’s January 2015 target of eight per cent.