MC Explains | What's driving inflation down?

Latest data from the National Statistical Office (NSO) showed that the Consumer Price Index (CPI)-based inflation rate eased to a three-month low of 6.77 percent in October from 7.41 percent in September.

Food price inflation cooled to 7 percent from September's 22-month high of 8.6 percent. The fall was led primarily by a favourable base effect.

Food and beverages constitute 46 percent of the CPI basket. The moderation in food and beverages inflation was also led by a favourable base effect.

Vegetable price inflation slowed to 7.8 percent in October — an eight-month low — from 18.2 percent in September.

Lower inflation could signal good news for policymakers, but it was also the 10th straight month of inflation staying above the Reserve Bank of India’s (RBI) tolerance ceiling of 6 percent.

Since early May, the central bank has undertaken aggressive policy tightening to bring inflation down and increased the policy repo rate four times, including by 50 basis points in the September meeting. One basis point (bps) is one-hundredth of a percentage point.

Finance Minister Nirmala Sitharaman has said on several occasions that inflation continues to be the one of the top concerns for the Indian economy.

The finance ministry, in its reaction to the easing of inflation, said measures taken by the government to rationalise tariff structures of major inputs and to augment domestic supplies have helped push prices down. The ministry is hopeful the downward trend will continue.

Food and beverages constitute 46 percent of the CPI basket. The lower food price inflation print came despite soaring prices in early October as excessive rainfall and crop damage pushed up retail prices of garden vegetables.

Rising fuel and transportation costs have also kept their prices high. Moreover, as prices of some vegetables soared, demand shifted.

Consumers moved away from vegetables that they didn't want to pay steep prices for, says an economist. CPI inflation in October recorded a sharper moderation in urban areas — down from 7.3 per cent to 6.5 percent — compared to rural areas, where inflation eased to 7.0 percent from 7.6 percent.

Food prices are a volatile series. Moreover while vegetable prices have eased, cereal prices continue to rise. Food inflation will continue to be sticky.

Aditi Nayar, Chief Economist at credit assessor ICRA, explains that inflation will be a problem in specific areas, including food, while house rents could present “episodes of stress.”

Early data released for November shows prices of onions hardening because of a delay in Kharif arrivals. There are already indications of an uptick in prices of other vegetables such as potatoes, ginger, garlic, wheat flour, pulses and edible oils because of unseasonal rain in October impacting supplies.

Prices of some other vegetables and fruits such as tomatoes, cauliflower, okra, cabbage, bananas and guava have softened.

Global commodity prices and supply disruptions caused by excess rain continue to cloud India's inflation outlook.