CPI at 18-month low, but sticky core inflation may spoil party for rate cut hopefuls

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With the CPI inflation falling to an 18-month low of 2.19% in December, the expectation of an RBI rate cut, or at least a softening of a monetary policy stance, has gained steam. However, a closer look at the numbers may spoil the party for those asking for softer interest rates, as the core inflation still remains sticky.

The Consumer Price Index inflation fell in December primarily due to a fall in food and energy prices. Consumer food inflation, which measures prices of essential food items relative to general prices, fell to a 13-month low at 0.29% as the prices of fruits, vegetables and pulses continued to decline.

According to CARE Ratings, the fact that farmers have not gotten the MSP on their crops has depressed prices of pulses in particular which has affected both WPI and CPI. Fuel inflation also fell due to a significant fall in domestic petrol and diesel prices.

However, the Core inflation (excluding food, fuel and light, and transport and communications) was 5.7% in December on account of components such as health and education, where inflation has remained sticky due to inadequate supply.

According to CRISIL, the steadiness in the Core Inflation shows that it isn’t able to capture effectively the slowdown in demand-side pressures, especially private consumption, in the economy as indicated by the GDP data.

Nevertheless, the stickiness in core inflation assumes significance as it points out that most of the fall in inflation is due to volatile components. CRISIL, in its research note, said that there is 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.

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Confederation of Indian Industry (CII) in a statement said that the fall in inflation may prompt the central bank to resume its accommodative policy stance to give push to the investment cycle by reducing the borrowing costs of industry and thus supporting growth.

For the financial year 2019-20, inflation is expected to rise with increase in private consumption and investment, said CRISIL. Private consumption will be driven by ongoing salary revisions by the state governments and continued government spending on construction, CRISIL said. On the other hand, private investment would pick up as the corporations clear their balance sheet and capacity utilisation improves across sectors.

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