In a relief for consumers, the trend of weak inflation prints continued in September, when official data revealed that consumer-facing prices rose by just 1.5 per cent. This is the lowest inflation rate since June 2017 — that is, in 99 months. It is also the second time in the current fiscal year that the retail inflation rate has undershot the RBI’s comfort zone of 2 per cent to 6 per cent. The softening of the headline inflation rate — which is the rate at which the general price level changes year-on-year — was driven by deflation in food prices. Prices of vegetables in September were 21 per cent lower than the same month last year while the prices of pulses were 15 per cent lower. Overall, the consumer food price index fell by over 2 per cent despite oil prices rising by 18 per cent. The softening of food inflation was also crucial in ensuring that rural inflation was much lower than urban inflation.
However, while the overall story was on expected lines, there was a surprise in the data in the shape of a sudden spike in core inflation, which is calculated after excluding the prices of food and beverages, and fuel and light. It rose from 4.2 per cent in August to 4.6 per cent in September. In fact, including September, core inflation has now remained above 4 per cent for eight consecutive months. Much of the surge in the core is because of a spike in gold prices and housing inflation. But the story doesn’t end there. Analysts at ICICI Securities have found that even if one excluded gold prices from core inflation, the rate went up from 3.2 per cent to 3.7 per cent. Another measure called the super-core inflation rate accelerated even more, from 3.3 per cent to 3.9 per cent.
So while the softening of headline inflation is a cause for relief for consumers, the divergent trend of core inflation gives a moment of pause. Headline retail inflation looks all set to undershoot the RBI’s projections, especially since the September data still doesn’t capture a large part of the softening due to the cuts in the Goods and Services Tax. Initial estimates suggest that October inflation is likely to flatline; prices are likely to grow by just 0.2 per cent over October last year. This would suggest that another cut in interest rates in the RBI’s December meeting is a foregone conclusion. Yet, rising core inflation coupled with continued uncertainty surrounding US President Donald Trump’s tariffs would ensure that policymakers cannot take any data for granted.
