Watch out for demonetisation effect in retail inflation data

Gaurav ChoudhuryMoneycontrolRetail inflation data for November will be released later today, with analysts forecasting that it could fall below October’s 14-month low of 4.2 percent, mirroring weak demand as households and companies, hit by demonetisation, put off spending and investment.  The latest price data will be crucial as it would give an idea on how the unexpected ban on Rs 500 and Rs 1000 currency notes have affected shop-end sales.High inflation hurts people’s buying power, while low levels can indicate poor demand and weak economic activity.The currency recall has forced families to spend less, depressing the demand for some goods including perishable products in November.Retail inflation data, measured by the consumer price index (CPI), is the broadest metric to measure costs of living in India, also serves as the Reserve Bank of India’s (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.Consumer food price inflation, a metric to gauge change in monthly kitchen costs, will likely fall below October’s 3.3 percent, as a cash-crunch have hurt demand for both perishable and processed food items.The price data will also hold out cues on demonetisation’s effect on discretionary spending such as eating out.A slowdown in the consumer price index for “prepared meals”, a proxy to measure changes in restaurant meal rates and readymade food items such as sweets, can be indicative of lower out-of-home eating expenses. Discretionary spending on goods and services in the retail inflation index excluding food and fuel – constitute 16 percent of the CPI basket – may have been worst affected by restricted access to cash.The price data will also hold 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.Price and factory output data will give out the clearest indications about demonetisation’s impact on sales and investment.Data released last week showed that India’s factory output fell (-)1.9 percent in October from 0.7 percent in the previous month, signs that festive season shopping have failed to trigger an industrial revival. Latest data showed that consumer durables output grew 0.2 percent in October from 14 percent in the previous month, an unexpected slowdown given that TV and refrigerator sales usually peak during the Diwali month.Consumer durables output and sales could slowdown even more in the coming few months following the scrapping of high denomination currency notes and the limit on daily and weekly cash withdrawals.The ban has also upset families’ spending plans on cars, televisions and refrigerators that peak during the wedding season during October-March.The RBI has retained its March-end retail inflation forecast of 5 percent, but high oil prices and rising interest rates 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.