Continued pass-through of RBI policy actions aid decline, say economists.
The core consumer price index (CPI) inflation is likely to stay below the 4% mark in near term due to the “continued” pass-through of monetary policy actions as well as changing consumer spending patterns, say economists.
Data released on Monday showed that core inflation, which excludes food and fuel components within the CPI basket, declined to a 50-month low of 3.6% in January from 3.9% in December. Since the beginning of the current fiscal, core inflation has stayed consistently below the 6% mark.
One aspect of the fall may be attributed to a high base effect as core inflation had averaged 6.1% in FY23. But a sustained decline also shows weakness in demand conditions, which is partly a result of RBI’s monetary policy actions. The central bank has kept the policy repo rate unchanged at 6.50% since February 2023.
Last week, the RBI’s monetary policy statement had noted that the continuing pass-through of monetary policy actions and stance is keeping core inflation “muted”.
However, some economists feel that the changing purchasing behaviour of consumers is leading to a sustained decline in core inflation.
“We believe that people are actively using e-commerce websites to buy essentials (preferably at discounted price) and hence demand is migrating from offline to online mode,” said Somya Kanti Ghosh, group chief economic adviser, State Bank of India, in a report. “If this is durable, then core inflation decline could be enduring.”
Ghosh noted that January recorded a 41-basis points decline in the inflation rate of a weighted average of “clothing and footwear/household goods and services” items in the CPI basket. This was due to the fall in inflation of saree, shirt, trouser, clothing material, washing soap, bedsheet, etc, which are part of daily living and hence doesn’t indicate decline in demand. It rather reflects changing consumer spending behaviour, he said.
The current CPI basket consists of 299 items and was constituted in 2012. Economists say that it doesn’t necessarily contain the items that are currently purchased by consumers, which makes it outdated and inefficient in capturing the accurate level of inflation in several sectors of the economy.
For instance, there are several items purchased online which are not a part of the CPI basket. If those are being purchased in the place of the items in the CPI basket items, the inflation data could show low levels of inflation of those components.
Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership, said that there could be some data quality issues with the CPI figures, as housing inflation at 3.2% seems too low. “Perhaps, the current CPI series that is slated to be rebased is unable to capture the accurate level of inflation in some segments of the consumption basket at the least,” he said, while adding that the internals of core inflation don’t suggest any “abrupt reversal” of its trajectory in the near-term.
QuantEco Research said in a report that “in case of core inflation, while support from post-Covid recovery in supply chains continues to play out, low input price inflation for producers along with soft domestic consumption demand has been providing an additional downward bias”.
Source:financialexpress.com