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CPI inflation may stay elevated in the near term; base effect, direction of food prices will be key

January 14
15:29 2020

A combination of base effect and high food prices could keep consumer inflation reading high in January as well, economists said. This is because in January, 2019, consumer inflation inflation had fallen below 2 percent.

In December, consumer price index (CPI)-based inflation rose by 7.35 percent, the highest in 65 months, driven by high food and pulse prices. In December, food inflation rose by 14.12 percent as compared with 10.01 percent in the preceding month and 2.11 percent in the year-ago period. Core inflation, which is inflation excluding volatile components, too inched up.

Apart from the base effect, the higher food prices too is likely to play a decisive role in charting the inflation path, economists said. The direction of food prices will depend heavily on how monsoon pans out in June. A significant chunk of farmers in India depend on seasonal rains for irrigation needs.

“There will be a spike in January (in CPI inflation) due to base effect,” said D K Joshi, chief economist at rating agency, Crisil.

Will food prices persist?

“It is hard to say about food prices (as of now),” said Joshi of Crisil.

In a research note, Crisil said spike in the food prices is the main villain in the inflation story. “While food inflation has ascended to double digits, it is not broad-based. It is specifically in vegetables, followed by pulses, which are behind the surge,” said the rating agency in the report.

According to Food and Agriculture Organization (FAO), global food prices continued to surge through December. The FAO food price index, which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat and sugar, jumped to its highest level since December 2014.

Even if food prices ease (which depends on monsoon), retail inflation is unlikely to recede significantly because core inflation is remaining sticky. In December, core inflation stood at 3.54 percent, the highest since September last year.

High, persisting retail inflation and slowing growth is a risky combination for an aspiring economy. Economists call it ‘stagflation’. When large economies collapse to a state of ‘stagflation’, typically the recovery takes much longer, former Prime Minister and former governor of the RBI, Manmohan Singh had warned. India’s GDP growth is expected to fall to 5 percent in the ongoing fiscal.

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