At 4.6% in Oct, retail inflation breaches RBI comfort level after 15 months

But core inflation, which excludes the volatile components of food and fuel, stood at 3.3 per cent in October; this is its lowest in eight years

Consumer prices rose at 4.6 per cent in October, the fastest rate since June last year, reflecting that vegetables and pulses have become more expensive in the country.

This is an inch above the median 4 per cent target set by the Reserve Bank of India under its inflation-targeting framework.

But the core inflation rate, which excludes the volatile components food and fuel, dropped to its lowest in the past eight years, at 3.3 per cent, in October. 

Core inflation represents the demand and pricing power in the economy, and a sharp drop in October portends feeble prospects of recovery in the current quarter also.

The food inflation rate rose to 7.9 per cent, the highest in 39 months, with vegetables (up 26 per cent) and pulses (up 11.7 per cent) contributing the most to this.

Food inflation in urban areas, at 10.7 per cent, is the highest in six years.

But in part, this ramp-up is due to a low-base effect, as food prices were stagnant for the most of 2018. 

Experts said low core inflation would prevail over rising headline inflation as the monetary policy committee (MPC) gears up for its December meeting, staring at another slowing quarter. 

“While volatile food inflation is an idiosyncratic factor, core inflation reflects weaknesses in the economy. While it is generally sticky (rarely moves fast), it has been hammered down by a weak economy,” D K Joshi, chief economist at CRISIL, told Business Standard.

He said growth was slowing fast, and it had opened up further the space for monetary easing. 

Ananth Narayan, who teaches finance at a premier business school in Mumbai, said a declining core inflation rate showed that pricing power in the economy had diminished. 

“While this makes growth the chief concern before the MPC, the struggle to ensure efficient transmission in lending rates would assume even more importance in coming months,” he said.

Economists also said inflation would stay at above 4 per cent for some more months, owing to the low base effect. 

“Food price inflation is likely to increase further at least till March next year, mainly due to food price deflation till February 2019 and low inflation in March 2019,” said Devendra Pant, chief economist at India Ratings. 

Core inflation was flying above 6 per cent in 2018, which had prompted the then MPC led by former governor Urjit Patel to raise policy rates, and change stance to calibrated tightening. This was followed by a gradual fall in core inflation, a rate cut cycle that has spanned 135 basis points since February 2019.

“Overall, CPI inflation may remain higher than 4 per cent in the remainder of FY20, complicating policy choices in light of the slowdown in the economic growth momentum,” Aditi Nayar, principal economist at ICRA, said.