The current tightening of monetary policy and some evaporation of pent-up demand should also assist reduce CPI inflation.
Consumer price index (CPI) inflation unexpectedly reached 6.5 percent in January, up from 5.72 percent in December and 5.88 percent in November of previous year, according to data released on Monday by the Ministry of Statistics & Programme Implementation. Economists have called this “worrisome.”
“CPI inflation increased to 6.5% in January, which exceeded our estimates and is concerning. As food prices and core inflation were steady, inflation sequentially ended a two-month contractionary skid, according to Rajani Sinha, chief economist at CARE Ratings.
The lead economist of Emkay Global Financial Services, Madhavi Arora, stated that “today’s inflation shocker, led by food, as well as continually increasing core inflation trend, has indicated we are far from the ‘lasting disinflation’ process.”
While vegetable costs decreased for the third consecutive month, according to Sinha, the pace was insufficient to offset the steep increase in basic commodities including grains, meat, fish, milk, and eggs.
“From 37% in December, food inflation’s share of overall inflation increased to 44% in January. While housing, personal care, and healthcare inflation increased, core inflation remained stable at 6.3%, she continued.
Sinha claims that while overall CPI inflation is anticipated to reduce to 5.1% in FY24 as a result of falling prices for grains and pulses, the sticky core inflation would continue to be a worry.
The current tightening of monetary policy and some evaporation of pent-up demand should also aid lower CPI inflation.
“This unexpected increase in inflation occurred after the RBI reduced its 4QFY23 CPI projection downward by 20 bps in the most recent MPC decision. This demonstrates how unpredictable the inflation trajectory may become, even for short-term projections, and may help to explain why they have maintained their current attitude of withdrawing accommodations in order to retain policy flexibility, according to Arora.
She claims that the inflation rate for 4QFY23 may now be as much as 50 basis points higher than the RBI’s updated projection, which might also prompt the RBI to further tighten its policy going forward.
“From a policy standpoint, we think that more rate increases are improbable. However, we must exercise caution since the Reserve Bank of India (RBI) has left the door open to the prospect of another rate increase in the event of a persistent increase in inflation, according to Sinha.
