InvestorQ : How do you see the latest inflation number for the month of Jan-21?
Arti Chavan made post

How do you see the latest inflation number for the month of Jan-21?

Rutuja Nigam answered.
2 weeks ago

On Friday, the 12 February, the Ministry for Statistics and Program Implementation or MOSPI announced the inflation numbers and the IIP or index of industrial production numbers. Normally, inflation is announced for the immediate preceding month i.e. Jan-21 in this case. However, the IIP is announced only with a one month lag i.e. December 2020 in this case.

The CPI inflation, which is predominantly weighted in favour of food basket came in at 4.06%. That is a sharp fall in inflation and represents a fall of more than 300 basis points in the last 2-3 months. The fall in CPI inflation in the last two months has been much quicker than expected. From a level of almost 7.5%, the CPI inflation has tapered very close to the 4% mark in Jan-21.

Let us look at what triggered this sharp fall in inflation? That has been largely led by a steep fall in food inflation, which was largely expected after a very robust Kharif output in this monsoon and expectations that even the Rabi crop output during the previous year winter would have been much better than anticipated.

Clearly, the surge in supply of food grains combined with supply chain remedial measures initiated by the government managed to address the problem of food prices to a large extent, if not entirely. While food inflation continues to remain cyclical, the good news is that now it is close to the RBI target median rate of 4%. This has larger implications for monetary policy as the RBI is not under pressure to hike rates.

But there is a bigger concern on the inflation front and that is that core inflation still holds the key to sustainable long term inflation. That is still not too comfortable. For example, core inflation is the residual inflation number after excluding the effects of food and fuel inflation. That core inflation has stayed almost stagnant around the 5.7% mark.

Let us see why core inflation matters. The reason core inflation is important is that it is the stickier part of inflation that is non-cyclical. The latest Economic Survey had pointed that inflation focus must gradually shift to core inflation instead of headline inflation. Despite the sharp fall in CPI inflation to 4.06%, the core inflation is stuck at around 5.7%. That means; the structural issues in farming and industry are yet to be addressed in a convincing manner.