October’s inflation reading of 4.87 per cent comes as a relief, even if it is seen as a typically seasonal trend. From a four-year high level of 7.4 per cent in July, retail inflation has mercifully trended downwards; as a result, the Reserve Bank of India’s Q3 inflation projections of 5.6 per cent may well be undershot. However, as the RBI Governor Shaktikanta Das has observed from time to time, inflation remains a threat. There are headwinds in the form of a lower kharif foodgrains output in particular (a 5 per cent drop, according to the first advance estimates), besides crude prices ruling above the comfort zone, that could bring about a shift.

The RBI is likely to stay ‘disinflationary’ in its stance, which perhaps rules out a rate cut in the near future. What, of course, has complicated any decision on a rate cut is global geo-political and financial uncertainty — the latter being brought upon by the recent downgrades of US debt. The October inflation dip was primarily on account of a decline in core inflation. Food price inflation remains almost unchanged compared to September (6.6-6.7 per cent), with cereals, pulses and spices inflation at 10.7 per cent, 18.8 per cent and 22.8 per cent. The core inflation dip is a result of lower input costs compared to the levels that prevailed in 2022 in the aftermath of the Ukraine war. This is reflected in negative wholesale price inflation since April. The WPI inflation for October, released on Tuesday, points to a 1.13 per cent decline in manufactured products inflation, besides a 2.47 per cent fall in fuel products, while primary articles have edged up 1.82 per cent.

The role of TOP items (tomato, onion and potatoes) may not turn out to be a big cause for worry, even as onion prices have risen double digits over the last month. Apart from the fact that this trio accounts for just 2 per cent of the CPI, onion prices (0.64 per cent weightage) have not been as volatile as tomato prices earlier — also because agencies such as NAFED have procured five lakh tonnes. However, a spike of over 50 per cent y-o-y could raise CPI readings by about 25 basis points. Pulses inflation, though, remains a concern. Its persistent rise could have adverse nutritional outcomes — while cereals inflation too has ruled in double digits for months on end.

Apart from supply side factors pushing up prices of cereals and pulses, there is an element of stickiness to core inflation. A December 2022 RBI paper by Michael Patra and others shows that core inflation was at a virtually flat 6 per cent over the year ending at Q3 of FY23, raising questions over whether fuel and food-driven price rise was becoming ‘generalised’. Health, education, personal care, recreation and household goods prices, which account for nearly a third of the CPI, exhibit sticky features. It is not altogether clear whether demand is driving prices overall, given indications of ‘premiumisation’. More research into these areas would help stakeholders.