The CPI clocked at 3.8 percent in October 2017. The monthly increase stood at 0.7 percent. The Jul-Oct headline inflation, averaged at 3.5 percent - still very comfortable for policymakers. That said, balance of payment concerns are acting like a sword on CPI as any adjustment in currency or upward movement in commodity prices, especially oil, can take both inflation and policymakers out of their comfort zones.
Core inflation which has been north of five percent for twelve consecutive months does not yet pose any immediate threat as NFNE slightly toned down to 5.3 percent from its peak of 5.6 percent in Jul17. The trimmed core is down to 4 percent in Oct17 from its peak of 4.8 percent in May17.
Don’t get too excited as numbers can be deceptive in short run. The base effect has its role to play. The monthly CPI was high in Oct16 that is why even 0.7 percent surge in Oct17 has kept CPI indices yearly growth low. Nov16-Feb17 was the period when monthly inflation remained much low (averaged at 0.0%) and if there is any surge in monthly numbers this November - the headline numbers may jump. For instance, 0.5 percent monthly increase each in coming four months will take CPI to 5 percent plus in Nov-Feb; and 0.6 percent increase will take CPI to cross 6 percent in Jan18.
One reason for high monthly number in October is the quarterly revision in house rent index - up by 0.98 percent over September17 and that explains one third of CPI increase. The house rent index increased by 1.34 percent which is not too high and the next increase would be registered in January. Hence, the toll would remain low in Nov-Dec.
The other major contributor to CPI is food - the sub index is up by 0.62 percent on monthly basis and that explains almost another one third of headline increase. Within it the culprit is perishable food items – up by 1.7 percent over September17 and 16.4 percent over October 16.
The third factor is the monthly surge of 3.7 percent in education prices which have contributed over one fifth in headline inflation. It does not only have low weight but is not also on the priority of government and has largely become a private service anyways.
The worrisome part is the surge in the transport group lead by the increase in motor fuel and all. The motor fuel increased by 1.9 percent in Oct17. And the prices have increased by 4 percent and 5 percent for petrol and diesel in November respectively. Seeing the trend, prices may further inch up in December before it normalizes. Thus, the transportation index will cascade into the prices of other items as well in coming months.
The 1HFY18 inflation would be between 3.5-4 percent. And it may inch up to 5-6 percent in the second half. The numbers are derived with assumptions for oil prices to stay around current levels, and perishable foods items’ increase to be arrested. However, any deviation from these assumptions, especially oil, can result in spiraling inflation.
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