Retail inflation rises to 5.11% in January on costlier food

NEW DELHI: After revamped GDP numbers that showed the Indian economy was growing at a better pace than previously estimated, a reworked consumer price index (CPI) on Thursday showed inflation picked up pace in January--two items of data that would ordinarily be seen as denting the prospect of any immediate monetary easing by the Reserve Bank of India.
Consumer inflation rose to 5.11% in January against 4.28% in December under the revised CPI series, data released by the central statistics office showed on Tuesday. Under the old series, inflation in December was 5%.Retail inflation is still below RBI’s March target of 6% and below expectations, but most experts said the central bank will watch the February 28 Budget before taking a call on further cuts in interest rates.

In a surprise move, RBI had cut repo rate by 25 basis points on January 15 but left rates unchanged at the scheduled review of monetary policy on February 3. “The likelihood of a rate cut prior to the April 2015 policy meeting appears low,” said Aditi Nayar, senior economist, ICRA. The revamped GDP numbers based on a new 2011-12 base in line with the internationally accepted marketprice based method showed India’s economy was set to grow 7.4% in the current fiscal.

The new numbers have baffled many economists and even RBI governor Raghuram Rajan has called for caution in reading them, suggesting that they may not weigh too heavily on him as he charts monetary policy. Taken at face value though, the data ease pressure on the central bank to cut rates further. However, the index of industrial production (IIP) released along with CPI showed growth slowed to 1.7% in December from 3.9% in the previous month.

CPI has become the key measure of inflation used by the RBI for monetary policy action. “Despite the rise in inflation in January, inflation remains in the comfortable zone. We expect RBI to deliver rate cuts in the range of 50-75 bps in the next fiscal,” ratings agency Crisil said in a note. It expects average retail inflation of 6.5 % in the current year and 5.8% next fiscal, supported by lower crude prices and a normal monsoon.

Apart from the revamp of the basket used to measure CPI, the index now has 2012 as the base as opposed to 2010 earlier. The revamped index captures changes in consumption with the weights of the categories being derived from the 2011-12 National Sample Survey Organisation (NSSO) household consumer expenditure survey, against the 2004-05 survey in the existing series.

The share of food in the CPI basket fell to 45.8% in the new series from 47.5% on account of consumption shifting from the food to the non-food category with the rise in income levels. The share of clothing and footwear in the CPI basket has seen a substantial increase from 4.7% to 6.5% with 7.36% in rural areas and 5.57% in urban areas.

In the new index, rural areas saw a sharper rise in inflation compared with urban areas because of the higher weight for food items. Consumer inflation in villages went up to 5.25% from 4.16% in the previous month, whereas that in towns rose to 4.96% from 4.5%. The consumer food price index posted an inflation of 6.06% during the month. Vegetable price inflation shot up to 9% in January while it was around 0.58% in December on the old series.

“The inflation is marginally lower under the new series for two reasons. One, the waiting diagram has shifted away from food to non-food in a very smallway. Secondly, it is also lower because the geometric mean gives a slightly lower inflation than the arithmetic mean,” TCA Anant, chief statistician of India, explained.