Opinion Inflation is low, but policymakers cannot take their eye off the ball

India’s headline inflation rate rose by 0.7 per cent in November. In other words, the overall price level in the economy rose by less than a per cent this November when compared to where it was 12 months ago. By itself, this confirms what the Governor of Reserve Bank said in the recent monetary policy review: That inflation at “a benign 2.2 per cent” (for the full year) and growth at 8.0 per cent in the first half of the current financial year “present a rare goldilocks period” for the economy. While the November number is low, it was a modest increase over the inflation rate in October. But the turnaround is not entirely surprising since inflation hit a record low of 0.3 per cent in October. Nor can the uptick be necessarily called a rebound since the move is too small and that too over just one month.

The low November print has been part of the larger disinflation trend. In October 2024 India’s inflation rate was 6.21 per cent; higher than the RBI’s comfort zone of 2-6 per cent. But since then, there has been an almost secular decline in the inflation rate — disinflation — barring two instances (August and November) when the inflation rate moved up. The fall has been so substantial that in the second quarter of the current financial year (July, August and September), the average headline inflation for a quarter came in at 1.7 per cent — lower than the RBI’s comfort zone. In fact, this is the first time since the adoption of the flexible inflation targeting regime in August 2016 that the lower bound of the RBI’s comfort zone has been breached.

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Policymakers would do well to keep their eyes peeled for changes in underlying factors that determine headline inflation. There is a difference between headline inflation and core inflation (that is, inflation after the effect of food and fuel items is removed). The bulk of the disinflationary trend is because of a sharp collapse in food prices. Food inflation was almost 10 per cent in October last year but it has been in negative territory since June this year. Since food items account for almost 50 per cent of the weight in calculating retail inflation, the deflation in food prices moves the headline number quite substantially in either direction. If one takes away food prices, core inflation has actually been trending up over the past year and stands at 4.3 per cent — from 0.7per cent. While gold is a key culprit for this divergence, it underscores how policymakers cannot take their eyes off the ball.