Core inflation remains close to RBI threshold

Wholesale Price Index (WPI)-based inflation fell to 6.2 per cent in December 2013 from 7.5 per cent in the previous month, primarily as price rise of vegetables moderated sharply. Vegetables' inflation fell to just over 57 per cent in December, after averaging 85 per cent for four months.

Inflation across several manufacturing categories, excluding metals, declined (or remained almost unchanged) in December, reflecting the lack of pricing power of corporates in the face of weak domestic demand. Despite this, non-food manufacturing inflation, the Reserve Bank of India (RBI)'s measure of core inflation, rose slightly to 2.8 per cent in December from 2.7 per cent last month, as the pace of decline in basic metal prices slowed. Non-food manufacturing inflation, hence, remains close to the RBI's threshold of three per cent for the same. Deflation in basic metal prices eased to 1.1 per cent in December from 1.5 per cent the previous month, reflecting rising global demand as growth in advanced economies picked up in the fourth quarter of 2014.

CRISIL's Core Inflation Indicator (CCII), an alternative measure of core inflation, however, remained unchanged at 3.2 per cent in December.

The CCII excludes metals and includes manufactured food articles in measuring domestic demand-side pressures on prices. This is because metal prices are largely influenced by changing global demand and volatility in exchange rate, rather than domestic demand. Manufactured or processed food prices, in contrast, reflect a second-round impact of inflation in primary food articles and, therefore, captures domestic demand-side pressures in the economy.

In December, inflation in primary food declined to 13.7 per cent from an average 19 per cent in the previous four months and manufactured food inflation fell to 1.8 per cent in December from 2.5 per cent last month. Unfortunately, the decline in manufactured food inflation was offset by an increase in metals inflation, driven by rising global demand. Overall, the CCII remained unchanged in December.

Some pick-up in rural consumption due to a normal monsoon and higher metal prices driven by global recovery is likely to create upward pressure on non-food manufacturing inflation. The upside to the CCII, however, might be lesser as it excludes metals. Therefore, the coming quarters might see non-food manufacturing inflation gradually rising above the CCII.