Retail inflation may be cooling. Here’s why

The basket of goods and services used to compute retail inflation now has nearly 49.3% items that are within the central bank’s inflation tolerance range of 2-6%, a Mint analysis showed. This is the highest share of these items within the target range in the last five years, indicating that inflation could well be on its way to moderation.

However, this was not enough to drive down inflation last month, because prices of some food items and vegetables, which have a stronger influence on the headline inflation due to their higher weight, rose sharply during the month. Each item in India’s Consumer Price Index (CPI) basket has its own weight in final inflation calculations, which reflects how much it is actually used by households relative to other items.

The CPI data was available for 292 items in November, of which 144 had a year-on-year (y-o-y) price rise of 2-6%. The dominance of such items was the highest since April 2018. These 144 items had a combined 55.6% weight in the basket, a sharp rise since October and the first time in 21 months when such items outweighed the rest in the CPI basket.

Alongside, the number of items exceeding the upper limit of 6% has declined substantially since January. This indicates that the relief in inflation could be gaining pace.

A report by QuantEco dated 12 December had said “inflation moderation is gradually getting entrenched", an observation substantiated by the analysis.

India’s retail inflation climbed to 5.5% in November from October’s 4.9%, marking a reversal from the easing trend seen over the preceding three months. Still, this was below market expectations: a Mint poll of 23 economists had predicted inflation at 5.8%.

So far this year, retail inflation has consistently exceeded the Reserve Bank of India’s (RBI’s) medium-term target of 4%, reaching a 15-month high of 7.44% in July as vegetable prices shot up, prompting the central government to impose export duties and subsidize retail sales.

The upturn in November was also primarily driven by elevated food prices across various categories, particularly pulses and vegetables, pushing food inflation to its highest level in three months. Food inflation accounts for nearly 40% of the CPI basket.

“The surge in food and beverages inflation to 8% in November was largely led by a sharp increase in vegetables inflation, even as seven of the 12 food sub-groups reported a moderation in their (year-on-year) inflation print," said Aditi Nayar, chief economist at Icra Ltd.

While prices of kitchen essentials continue to be a pain point, core inflation, which excludes volatile elements like food and fuel, showed some moderation after remaining sticky for a prolonged period in the recent past. This provides a relief to the central bank, which kept the key repo rate unchanged in last week’s policy meeting, citing high inflationary pressures from food prices.

“The sustained easing in core CPI inflation is a positive, and has counterbalanced the menacing food inflation prints over the last few months," said Nayar.