CPI inflation continues its downward journey

Inflation based on the consumer price index (CPI) fell to an 18-month low of 2.19% in December on negative food and softening core inflation, besides a high base of the previous year.

With this, inflation has fallen for the fourth consecutive month. However, there could be some upside from next month as the statistical high-base effect starts waning.

Food inflation has been negative since October and has been the major factor behind the decline in headline inflation. Sans food, inflation continues to remain above 5%.

Fuel inflation also moved down sharply, given a significant downward movement in domestic petrol and diesel prices.

Interestingly, core inflation - which strips out the volatile categories such as food and fuel - again went up. This is largely on account of components such as health and education, where inflation has remained sticky because of inadequate supply. Core inflation, therefore, isn’t able to capture effectively the slowdown in demand side pressures, especially private consumption, in the economy as indicated by the GDP data.

The current inflation and growth scenario seems to have created adequate room for the Monetary Policy Committee (MPC) to consider changing its monetary policy stance from calibrated tightening to neutral and administer a rate cut going ahead.

For fiscal 2019, CRISIL forecast CPI inflation at 3.7% (revised down from 4.6% earlier) compared with 3.6% recorded in fiscal 2018 given the continuous and sharp decline in food prices and slowdown in international crude oil prices compared with a few months ago. In fiscal 2020, however, inflation may see some upside as a) food inflation, which has remained unusually low, might move up if the monsoon this year is inadequate; b) some global indicators are already pointing to higher food inflation in 2019; and, c) core inflation, which remains sticky, moves up on factors such as implementation of Pay Commission hikes by more states and populist measures such as farm loan waivers. Accordingly, CRISIL pegs fiscal 2020 CPI inflation at 4.5%.