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Statsguru: Will headline inflation converge to core inflation?

While core inflation touched 5.36 per cent in January, the headline retail inflation rate dipped to 2.05 per cent

Ishan Bakshi  |  New Delhi 

illustration, inflation
Illustration: Ajay Mohanty

In the recent past, economists struggled to decipher the changing inflation dynamics in India. The pre-2013 period was characterised by converging to But, post 2013, this changed with converging to the core. However, this hasn’t been the case past year.

While touched 5.36 per cent in January, the headline retail inflation rate dipped to 2.05 per cent (Chart 1). Further, the consumer food price index contracted by 2.17 per cent in January, even as wholesale food prices rose by 2.3 per cent (Chart 2).

ALSO READ: India's inflation likely eased to 16-month low in Nov as fuel prices dip

In a recent article, economists at HSBC pose an intriguing question — why have headline and moved in opposite directions even as inflation expectations (Chart 3) are now better anchored? The answer, they argue, is that “a slew of price shocks that have hindered convergence over the past year.”

For instance, the decline in the food inflation rate is driven by both structural and cyclical factors, while much of the recent rise in core inflation is driven by rising health and education inflation (Chart 4) particularly in rural areas. Now, the economists at HSBC argue that once these price distortions ease, food inflation will pick up, while core inflation will fall to a more stable level. “It is then that will converge towards core.” The recent data shows that even as headline WPI and CPI appear to have converged (Chart 5), WPI — manufactured products is falling (Chart 7) which should impact core inflation going forward.

With headline inflation expected to remain subdued, economists expect the to cut the benchmark repo rate by 25 bps in its next meeting.



StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines | Compiled by BS Research Bureau

First Published: Sun, February 24 2019. 23:57 IST
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