Retail inflation falls to 3.41% in December as cash crunch bites
India‘s retail inflation rate grew 3.41 percent in December from November‘s 3.63 percent, confirming fears of weak demand as households, hit by a demonetisation-induced cash crunch, put off spending.
India’s retail inflation rate grew 3.41 percent in December from November’s 3.63 percent, confirming fears of weak demand as households, hit by a demonetisation-induced cash crunch, put off spending.
Low inflation levels can indicate poor demand and weak economic activity. The moderation is sharper on an annualized basis.
Retail inflation had grown 5.61 percent in December 2015, indicating a more expansionary economy a year ago.
The latest price data is emblematic of the slide in shop-end sales, triggered by the unexpected ban on Rs 500 and Rs 1000 currency notes in November.
Consumer food price inflation, a metric to gauge changes in monthly kitchen costs, also moderated to 1.37, more than five percentage points lower than 6.40 percent a year ago, reflecting how the cash-crunch has hurt demand for both perishable and processed food items.
The currency recall has forced families to spend less, depressing demand for some goods including perishable products in November.
Discretionary spending on goods and services in the retail inflation index excluding food and fuel, which constitute 16 percent of the CPI basket, appear to have been worst affected by restricted access to cash.
For instance, demonetisation appears to have had an adverse effect on eating out.
The growth in consumer price index for “prepared meals”, a proxy to measure changes in restaurant meal rates and readymade food items such as sweets and packaged snacks, moderated to 5.64 percent in December in 2016 from 6.82 percent in December 2015 indicating that less money in their pockets have forced a cut-down in people’s spend on out-of-home dining. It was 5.82 percent in November.
The price data also held out pointers on demonetisation’s effect on prices of housing, fuel and light, health, transport and communication, pan, tobacco and intoxicants, and education that together account for 38 percent of India’s retail inflation basket.
Housing inflation grew by 4.98 percent in December from 5.04 percent in November.
At 3.41 percent, retail inflation is hurtling fast towards the government and Reserve Bank of India’s (RBI’s) the lower tolerance limit and can be a cause for worry unless steps are taken to engineer a quick turnaround in consumer spending.
Retail inflation data, measured by the consumer price index (CPI), is the broadest metric to measure cost of living in India, also serves as the RBI’s main guide for fitting trends in economy-wide price movements.
The RBI and the government have set a retail inflation target of 4 percent for the next five years with an upper tolerance level of 6 percent and lower limit of 2 percent.
In its monetary policy review last month, the RBI retained its March-end retail inflation forecast of 5 percent, cautioning that high oil prices could push up domestic prices.
The six-member Monetary Policy Committee (MPC) headed by RBI governor Urjit Patel is of the view low headline inflation rates could be masking rising prices protein and services costs.