There were three CPI groups that witnessed double digit change over last year in the August 2017 inflation numbers, Tobacco, health, and education. Only that, in the case of tobacco, it has moved south as cigarette manufacturers have been offered discounts to compete against illicit tobacco imports. In other news, the counterfeit medicines have been taken care of, and there seems no need for any incentive. Tobacco industry also contributes a heavy chunk to the country’s taxes. But all these are completely unrelated facts.
Coming to ‘serious’ stuff, the year-on-year CPI for August 2017 inched slightly up to 3.4 percent from 2.9 percent in July. This, however, sits at very manageable levels and way below the 12-month moving average that is in excess of 4 percent. The month-on-month change was even more manageable at just 0.19 percent.
Both perishable and non-perishable food prices remained well under control during the month. The impact of quarterly revision in house rent sub index was also recorded in the preceding months, lending further stability to the month-on-month number. That said just a little over 5 percent year-on-year increase in the house rent sub index remains unfathomable.
The downtrend in international commodity prices is well reflected in most sub heads, especially that of transport. Oil prices have finally woken up from the slumbers and crossed $50/bbl after quite some while, and the petroleum prices have also been increased of September, which would be reflected in September’s CPI. The recent trend in oil prices suggest a near-to-medium term upward pressure on oil prices, which could jack up the transport index directly, and along it, some items in the food index.
The recent trend in SPI and WPI suggests, headline inflation is likely to remain suppressed in the months to come. But the post North Korean test, the realities of the commodity world may change and it could have a lasting impact on a number of key commodities. Moreover, the rising current account deficit is still there to keep chances of currency depreciation alive.
As pointed out earlier by this column, imported inflation would not be a huge factor as long as the currency is pegged well with the US dollar.
Even with inflated oil prices, inflation is likely to stay well within the budgeted target of 6 percent for FY18. Having said that, there are enough reasons to not go for further easing, as the current account and fiscal deficit numbers read a horror story.