Amidst the debate on high food inflation and the need for interest rate cuts to support growth, as enunciated by two Cabinet ministers, core inflation has also been recording an uptick in recent months.
Core inflation measures the change in prices of goods and services excluding that in food and fuel from CPI inflation.
“Historically, core inflation has always been higher than food inflation and tends to average around 5%. However, core inflation doesn’t rise as sharply as food inflation as the latter is based on demand and supply,” noted Madan Sabnavis, Chief Economist, Bank of Baroda.
According to him, core inflation will continue to rise, albeit gradually, as companies have begun to pass on input costs to customers. “For a long time, companies have not increased prices of manufactured goods but they are now doing it. So core inflation is rising,” Sabnavis said, while noting that prices of services has been rising for some time.
Per data, core retail inflation, excluding food and beverage and fuel and light, shot up to 3.7% in October this year even as headline consumer price inflation rose to a 14-month high of 6.2% in the month. Analysts highlighted that this was the highest in 10 months and retail inflation is now becoming more broad-based, moving away from just food items especially vegetables such as tomatoes, onions, and potatoes.
“Core inflation (excluding F&B and F&L) rose 3.7% in October 2024, highest in 10 months, led by higher inflation in housing, education and personal care and effects categories,” said the Ecoscope report by Motilal Oswal Financial Services.
It also highlighted that services inflation hit a 12-month high of 3.5% year on year, while goods inflation rose to a 14-month high of 7.1% in October 2024. The consumer price index (CPI), excluding veggies (weight 94%), stood at an eight-month high of 3.6%. Imported inflation jumped to a 20-month high of 4.6% in October 2024, while domestically generated inflation increased to 6.4%, highest in 10 months, the report further noted.
“Standard core inflation (excluding food & energy) stood at 3.9% YoY in October 2024 (versus 3.7% in September 2024), highest in 10 months; Details confirm that 26% of the CPI basket posted 5%+ inflation last month,” the report said.
However, there is some expectation that core inflation could ease in the coming months as the uptick in housing prices was a seasonal phenomenon and there was a surge in gold prices in October.
Centre’s Pitch
In recent weeks, the Centre has made a case for a cut in interest rates citing that core inflation remains low and food and vegetable prices, largely kitchen staples of potatoes, tomatoes and onions have been driving retail inflation. With the economy seen to be slowing down, lower interest rates could potentially spurt investments.
Chief Economic Advisor V Anantha Nageswaran, on Tuesday, highlighted this and said noted that the recent increase in retail inflation is primarily driven by a small group of commodities. He pointed out that after excluding tomatoes, onions, potatoes (TOP), and gold and silver from the CPI calculation revealed that headline inflation as much lower at 4.2% in October.
Prior to that, Finance Minister Nirmala Sitharaman had also noted that bank interest rates would have to be more affordable while Commerce Minister Piyush Goyal had said that it is a flawed theory to consider food inflation for making a choice on rate cuts.
Rate cut in 2025?
The RBI’s Monetary Policy Committee is scheduled to meet between December 4 and 6. However, the RBI has remained hawkish and analysts expect a rate cut only to happen in early February at the earliest, if inflation data is more optimistic. The Monetary Policy Committee is tasked with targeting headline retail inflation at 4% with a tolerance band of 2% on both ways and for now cannot move to only targeting core inflation, Sabnavis pointed out.
“Governor Das’ commentary on the need to ensure a durable alignment of inflation to the
4% target and the absence of any credible growth sacrifice in doing so pushed out policy easing expectations. Food inflation has shot up and, and while vegetable prices should reverse, higher prices for other items like edible oils and wheat could be more persistent. Market participants seemed convinced that the December policy meeting is likely to be a non-event, and that the earliest the RBI could ease would be in the February meeting next year, a view that we recently endorsed in light of the hawkish RBI speak,” Nomura said in a recent report.
Action by US President-elect Trump on possible tariff hikes on imported goods is expected to raise prices of global commodities and analysts believe that this will be another key monitorable for the RBI, which could potentially look at cutting rates only in February.