Poll | CPI inflation may rise to 6.1% in January on unfavourable base, core pressures

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India's headline retail inflation is likely to have returned to 6-percent plus territory in January from December's one-year low of 5.72 percent.

The Ministry of Statistics and Programme Implementation will release retail inflation data for January at 5.30 pm on February 13.

According to a Moneycontrol poll of 17 economists, Consumer Price Index-based (CPI) inflation is expected to have risen to a three-month high of 6.1 percent last month on the back of an unfavourable base effect, which is seen to be pushing up food inflation in particular.

“Notwithstanding the welcome softening in prices of several essential commodities and healthy rabi sowing trends, an unfavourable base could cause the food inflation print to harden somewhat in January,” said Aditi Nayar, Chief Economist at ICRA.

According to data from the Department of Consumer Affairs, prices of 16 of the 22 items the department collates data on declined in January from December. The items which saw their prices fall the most on a month-on-month basis are tomatoes, potatoes, and onions, although the sequential fall in their prices was lower than in December.

“The pace of decline in vegetable prices has eased, with vegetables excluding onions, potatoes, and tomatoes showing an uptick, along with a sustained pick-up in cereal prices,” added Kanika Pasricha, an economist at Standard Chartered Bank.

Core pressures

Economists see non-food, non-fuel prices remaining elevated and keeping core inflation around the 6 percent mark.

“We expect core inflation to have edged down to 6 percent in January, after eight straight months at round 6.2-6.3 percent prints,” noted Rahul Bajoria, Chief India Economist at Barclays.

“Along with a higher base in December, we expect some deceleration in core prices sequentially, which is likely as corporate profit margins moderate from historically high levels. However, we expect reviving domestic demand and increasing pricing power to keep core inflation sticky for longer,” he added.

Core inflation has become a key concern for the Reserve Bank of India (RBI) in recent months.

In its statement on February 8, the Monetary Policy Committee (MPC) noted that further rate hikes were needed to keep inflation expectations anchored and break the persistence of core inflation.

Policy impact

At 6.1 percent, economists’ prediction for last month’s retail inflation print would be the 40th month in a row that it would have been higher than the central bank’s medium-term target of 4 percent. Also, it would also be returning to the 6-percent territory after spending only two months (November and December) in the mandated target range of 2-6 percent.

While the latest data will likely show that inflation rose in January – just days after the MPC moderated the size of its repo rate hike to 25 basis points on February 8 – it is unlikely to be the source of much concern.

“While the average CPI-based inflation in Q3 FY23 has come in significantly below the MPC’s projection of 6.6 percent, we foresee a flattish print in Q4 FY23, before a considerable correction sets in during Q1 FY24,” Nayar said.

CPI inflation averaged 6.1 percent in the third quarter of 2022-23.

The RBI's latest forecast, released earlier this week, sees inflation averaging 5.7 percent in the ongoing quarter.

In the next financial year, the central bank sees inflation moderating to 5.3 percent. However, economists think the forecast is on the higher side and will likely be undershot.

“The CPI inflation forecast given by the RBI is on the higher side, which raises the bar for further rate hikes. But there could be two factors which could push the RBI to go for another 25 basis point rate hike in April,” noted Kaushik Das, Deutsche Bank’s Chief Economist for India and south Asia.

The first of these is the significant worsening of core inflation, while the second is the US Federal Reserve hiking interest rates “materially higher” than market expectations.