CPI holds on at 3.3%; food dips but fuel and core inflation climb up

Consumer price index (CPI)-based inflation for September was unchanged at 3.3% from August. While food inflation fell 23 basis points (bps) on-month to 1.3%, fuel inflation rose 35 bps to 6.4%, and core inflation was marginally up 10 bps to 4.4%.

Food inflation fell in September, reversing a two-month trend. At 1.3%, it was lower than 1.5% in August, led by continued decline in inflation in cereals and pulses, and a fall in inflation in vegetables.

This year’s near-normal monsoon suggests agriculture production growth is likely to follow trend. This, coupled with last year’s bumper crop, will keep food inflation in check. Meanwhile, global food inflation is also forecast to stay benign, which will provide a further downside to domestic food inflation.

Meanwhile, core inflation edged up 10 basis points to 4.4%, primarily led by higher inflation in housing, recreation and personal care and effects. The nature of these items – mostly services -- suggests that part of the higher inflation could have been due to the implementation of Goods and Services Tax (GST). GST rates for most services are higher than the erstwhile service tax rate and is likely to have pushed up prices.

Fuel inflation jumped to 6.4% from 6.1% in August, led by higher inflation in the fuel and light category, mainly liquefied petroleum gas and kerosene.

In the months ahead, inflation could see an upside from some bump up in oil prices, and higher household spending led by (i) implementation of farm loan waiver and (ii) an expected upward revision in salary and allowances of state government employees. Yet, domestic food inflation is expected to stay low aided by a good monsoon, and this will play a key role in keeping overall inflation in fiscal 2018 low.

CRISIL expects CPI to average 4% in fiscal 2018 (down from 4.5% in fiscal 2017). Going ahead, if the risks to growth rise, and inflation undershoots the Monetary Policy Committee’s forecast, then there is a possibility of a rate cut. Second-quarter GDP data will be a key deciding factor here. If growth declines further, it can potentially bring down core inflation, too. A dip in core can provide a faster downside to overall inflation.