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The government on Thursday expressed optimism that the rate of retail inflation will moderate by July. Rate of retail inflation based on the Consumer Price Index (CPI) surged to a 68-month high in January at 7.59 per cent.
“Increase in inflation is transitory. Given the inflation dynamics, headline inflation should converge to core inflation by July,” Chief Economic Advisor Krishnamurthy Subramanian said. Core inflation implies overall rate of inflation minus inflation related to volatile items such as fuel and food. For the month of January, core inflation was 4.2 per cent as against 5.4 per cent in January last year. This implies that headline rate of retail inflation is likely to come down between 4 and 4.5 per cent.
Onion is the culprit
Talking about the specific items responsible for surge in retail inflation, he said that onion has a weightage of just 70 basis points (100 basis points means 1 percentage point), but contributed 72 per cent in the increase of overall rate of retail inflation vi-a-vis core inflation during the month of January.
Referring to the Monetary Policy Committee’s (MPC’s) observation, he said that food inflation is likely to soften from the high levels of December with the arrival of fresh harvest and increased vegetable production. Fresh crop of onion is expected to hit the market by March. Crude prices may remain volatile with greater downside risk. He emphasised that empirical evidence pitched for a complete reversion of headline inflation to core within a period of 12 months after a fuel or food price shock.
MPC, in its statement, revised CPI inflation projection upwards to 6.5 per cent during the last three months . January-March 2019-20). It is estimated to be in the range of 5.4-5 per cent for the first half (April-September) of 2020-21 and 3.2 per cent in the third quarter (October-December) of 2020-21. The MPC expects risks to be broadly balanced.
Rate of retail inflation is a key to revision in policy rate changes. With rate much above the targeted level of 4 per cent with two per cent swing in both directions, the MPC is on pause after a reduction of 135 basis points during 2019.
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