Crash in prices of farm items: Retail inflation at low of 2.18 per cent in May on decline in food prices

The data released on Monday showed core inflation, too, dropped from 4.5 per cent in April to 4.3 per cent in May, recording a broad-based slowdown sequentially, with even services such as education, health and housing showing moderation

By: ENS Economic Bureau | New Delhi | Published: June 13, 2017 3:07 am
Farm Items, Retail Inflation, Food Prices, Business News, Indian Express, Indian Express News The data released on Monday showed core inflation, too, dropped from 4.5 per cent in April to 4.3 per cent in May (Representational Image) 

Retail inflation hit a record low of 2.18 per cent in May, mainly as food inflation touched a fresh low of -1.05 per cent, partly reflecting the crash in prices of farm items following a good harvest. With the real interest rate touching a 15-year high in 2016-17, the latest moderation in inflation (albeit aided by a favourable base effect) bolsters the case for a rate cut. It also brings to the fore the “plausible alternative macroeconomic assessment” put out by chief economic adviser Arvind Subramanian after the Reserve Bank of India’s monetary policy committee (MPC) decided to keep key policy rates unchanged last week: “(the RBI’s) inflation forecast errors have been large and systematically one-sided in overstating inflation”. He said not just headline CPI but even core inflation has dropped substantially in recent months.

The data released on Monday showed core inflation, too, dropped from 4.5 per cent in April to 4.3 per cent in May, recording a broad-based slowdown sequentially, with even services such as education, health and housing showing moderation. It was as much as 4.9 per cent in March.

Last week, the RBI trimmed its inflation forecasts for 2017-18. It projected headline CPI inflation at 2-3.5 per cent for the first half of 2017-18 and 3.5-4.5 per cent in the second half. In the April policy review, however, the RBI had forecast retail inflation to average 4.5 per cent in the first half of 2017-18 and 5 per cent in the second half. Analysts say the latest downward revision suggests the RBI may be accommodative on the future course of rates in a bid to prop up growth.

“Following the record harvests in 2016-17, the timely onset to the monsoon has eased concerns related to the trajectory of food inflation. However, the continued dip in reservoir levels, extent of revision in MSPs and stickiness in rural wages remain modest inflation risks,” said

Aditi Nayar, principal economist at Icra. But, overall, the trajectory for food inflation is expected to be relatively benign in the first half of this fiscal, which may soften inflationary expectations going ahead, she added. The positive base effect for food inflation is expected to continue till July 2017. Two of the key contributors to the plunge in food inflation in May were vegetables (-13.44 per cent) and pulses (-19.45 per cent).

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