The National CPI clocked at 12.6 percent in Dec-19 and the monthly decline is at 0.34 percent. The numbers are in line with the expectations. The perishable food items have started coming down. The next wave of inflation is to come through energy prices hike including upward trend in international oil prices.
The monetary policy in January is based on data till Dec-19. Do not expect any change. The headline numbers is likely to remain north of 12 percent till Feb-20 (data points for Mar-20 MPS decision). Expect no change. The based affect will come in play to bring down inflation March onwards. The first rate cut could well be in May-20.
The half year average inflation is at 11.1 percent. This is almost double from same period last year. The CPI will probably peak at 13 percent in Jan-20. The New Year may start with multiyear high inflation. Things are likely to start improving after this. The high base effect due to Oct-18 gas price increase and Mar-19 food prices increase will finally subside in Mar-20.
The good news in Dec-19 is that perishable food items are self-correcting. The sub index is down by 9.4 percent from the prices in Nov-19. Still the prices are up by 82.3 percent from the levels in Dec-18. The trend of falling perishable food items may continue in Jan-20. Tomato prices are down by 36.5 percent in a month, but still the yearly increase is 321 percent. More adjustments are likely to come. Similar is the story of onions, potatoes and fresh vegetables.
The new fear is the energy prices. The gas prices are ought to adjust as agreed with the IMF. The gaps in prices were kept for too long. The expected increase in prices effective from Jan-20 is estimated to be at average of 18 percent. The electricity tariff increase is minimal, as higher base tariff will be adjusted in Jul-20. There will be some fuel adjustments.
The upward trend in oil prices impact will be visible in Jan-20. The transportation sub index in Dec-19 is up by 0.98 percent over last month and 10.9 percent on yearly basis. The main reason for increase is transportation services and mechanical services. These are due to second round on inflation. The petroleum prices increase announced for January will have impact on CPI in next month release.
The other contributors to inflation hike in Dec-19 are woolen garments (too cold in North), tailoring (wedding season at peak), and construction input prices. The core inflation is moving steady. It stood at 7.5 percent and 8.1 percent respectively in Urban and rural segments. The numbers were 7.5 percent and 8.6 percent last month.
Sensitive price index (SPI) – a better barometer for poor inflation, inched down to 18.1 percent in Dec-19 from 20.2 percent in Nov-19. The number is still high – 6-month average SPI is at 14.9 percent. The impact of abnormal hike in perishable items is more visible in SPI. This is implying that more people are being dragged into poverty. Strengthening administrative measures and opening up of markets to competition are keys for sustainably bringing perishable food inflation in check. The SPI may decline further in Jan-20.
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