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Inflation spike transitory, expect it to drop to 4-4.5% by July: CEA

The surge in the PMI index in January would augur well for factory output growth, Krishnamurthy Subramanian said.

By: ENS Economic Bureau | New Delhi | Updated: February 14, 2020 5:08:32 am
 onion prices, onion prices surge, retail inflation, retail inflation india, food  inflation, Krishnamurthy Subramanian, retail inflation on inflation, indian express Chief Economic Adviser Krishnamurthy Subramanian.

A surge in onion prices contributed around 70 basis points to retail inflation that scaled a 68-month peak of 7.59 per cent in January, Chief Economic Adviser Krishnamurthy Subramanian said Thursday, stressing that the latest spike in inflation is “transitory” and is substantially driven by volatile vegetable prices and an unfavourable base.

He also pointed at a healthy co-relation of 0.53 between the Purchasing Managers’ Index (PMI) and the Index of Industrial Production (IIP), based on data for over seven years, and indicated that the surge in the PMI index in January would augur well for factory output growth.

The PMI for manufacturing scaled a near eight-year peak in January and that of services jumped to a seven-year high. The IIP, however, shrank 0.3 per cent y-o-y in December 2019, having reversed a modest rise in the previous month and recording its fourth contraction in five months.

Subramanian expected retail inflation to come down to a more realistic level of 4-4.5 per cent by July, as the effect of an inconducive base wanes. Fresh arrivals of crops, especially onion, in March and higher vegetable output will have a soothing effect on inflation in the coming months. Core inflation, meanwhile, stood at 4.2 per cent in January, against 5.4 per cent a year before, reflecting a certain degree of demand compression in the economy, Subramanian said.

This means the underlying inflationary pressure in the economy is not really a matter of grave concern yet.

Explaining the role of base impact, Subramanian said CPI inflation in vegetables spiked to 50.2 per cent in January from -13.4 per cent a year before. Similarly, inflation in pulses rose from -5.5 per cent to 16.7 per cent, food and beverages from -1.3 per cent to 11.8 per cent and overall food inflation from -2.2 per cent to 13.6 per cent. Headline inflation nudged up to 7.6 per cent in January from just 2 per cent a year earlier. —FE

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