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Last Updated : Dec 15, 2016 12:24 PM IST | Source: Moneycontrol.com

COMMENT: Don't blame demonetisation for the fall in inflation

That demonetisation would impact inflation was expected; however a dip to a two-year low was a surprise. The consumer price index (CPI) used to measure retail inflation touched 3.63 in November as compared to 4.2 percent in October and below the RBI comfort zone of 4-6 percent.



That demonetisation would impact inflation was expected; however, a dip to a two-year low was a surprise. The consumer price index (CPI) used to measure retail inflation touched 3.63 in November as compared to 4.2 percent in October and below the RBI comfort zone of 4-6 percent.

A closer look at the break-up of inflation numbers based on individual components shows an interesting picture. There are many points that show that the impact of demonetisation is not as deep as feared.

The main number which resulted in the fall is of course food inflation. An Edelweiss report says that disinflation was entirely led by a decline in food inflation which fell from 3.7 to 2.6 percent.

Lack of cash in the system has been cited as reason for a drop in food inflation, but is this the truth?

Details of sub-sections within food, beverages and tobacco sub-head shows that the drop has largely been on account of decline in vegetables prices to -10.3. However, vegetable prices have been sliding since June when it was a positive 14.8. The slide has been steady for the last five months.

The November fall was on account of a nudge from the arrival of the kharif crop in the market.

In fact, there has been a rise in inflation on daily consumption products like milk and its products, cereals and products. Barring perishables like fruits, vegetables and pulses which fell on account of higher arrivals, all other food items saw an uptick. According to Citi Research, adjusting for seasonality, CPI index has remained unchanged for the last six months.

Commenting on the numbers, Emkay Research says that leaving aside vegetable inflation, overall we witnessed an uptick of 86 percent (same as previous month) of the CPI components.

There are also no signs of lowering of spending in leisure which is reflected in flat numbers for recreation and amusement at 4.0, same as the previous quarter. However, household requisites have dropped a bit from 4.4 to 4.2, as has clothing, bedding and footwear from 5.2 to 5.0. But personal care and effects have increased from 7.2 to 7.7, partly on account of a rise in gold prices.

Core CPI (ex food, fuel and gold) has been steady and sticky at 5 percent showing no signs of demonetisation impact.

Emkay concludes that the inflationary pressure has not been impacted by the effect of demonetisation, the sharp deceleration in the headline inflation number was primarily a function of a skew in some of the volatile components.

So, if the note ban did not have much impact, does it mean transactions have moved from cash to electronic medium? That is a different story, watch this space for updates.

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First Published on Dec 14, 2016 04:05 pm
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