ET View: CPI likely to remain elevated for statistical reasons
The latest inflation numbers suggest that retail headline inflation, read the overall rise in consumer prices, has gone up beyond the 4% target set up Monetary Policy Committee (MPC). The MPC is mandated to policy-induce a narrow 4-6% range for th...
And there hangs a tale. The stickiness in the core inflation rate does underline loss of economic momentum and a slowdown in growth. Generally speaking, pricing power seems to have diminished.
The latest inflation numbers suggest that retail headline inflation, read the overall rise in consumer prices, has gone up beyond the 4% target set up Monetary Policy Committee (MPC). The MPC is mandated to policy-induce a narrow 4-6% range for the retail inflation rate. The CPI has risen at the fastest rate since June last year. The price rise in food items has been 7.9%, the highest in over 3 years, and much of it due to the over 26% rise in vegetable prices, and nearly 12% increase in that of pulses. The seasonal rise in vegetable prices suggests that logistical rigidities and supply bottlenecks seem to be coming in the way, in meeting demand.
The policy objective for the MPC is to target headline inflation, to attest the overall price-rise across goods and services. Core inflation need not be taken into account. However, the MPC is duly required to take into account the trend in growth levels, in deciding its key policy rate, which is supposed to indicate the overall cost of funds in the banking system.
It is likely that food inflation would come down in the next few months, as supply improves in the face of rising demand with imports and heightened domestic output. But it is also likely that CPI inflation would also remain above the 4% comfort level due to the low base effect. In its next review meet in December, the MPC would surely need to take into account the marked deceleration on the growth front, in reviewing its key policy rate so as to decide on monetary policy and the general cost of funds going forward.